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<SEC-DOCUMENT>0000853816-03-000004.txt : 20030312
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<ACCEPTANCE-DATETIME>20030312153959
ACCESSION NUMBER: 0000853816-03-000004
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20021228
FILED AS OF DATE: 20030312
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LANDSTAR SYSTEM INC
CENTRAL INDEX KEY: 0000853816
STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213]
IRS NUMBER: 061313069
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1226
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-21238
FILM NUMBER: 03600901
BUSINESS ADDRESS:
STREET 1: 13410 SUTTON PARK DRIVE SOUTH
CITY: JACKSONVILLE
STATE: FL
ZIP: 32224
BUSINESS PHONE: 9043901234
MAIL ADDRESS:
STREET 1: LANDSTAR SYSTEM INC
STREET 2: 13410 SUTTON PARK DRIVE SOUTH
CITY: JACKSONVILLE
STATE: FL
ZIP: 32224
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form_10k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2002
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
Commission File Number: 0-21238
-------
LANDSTAR SYSTEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1313069
------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13410 Sutton Park Drive South, Jacksonville, Florida 32224
- -------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(904) 398-9400
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Common Stock Rights
---------------------------- -------------------
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No[ ]
1
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $861,771,215 (based on the $53.425 per share closing
price on June 28, 2002, the last business day of the Company's second fiscal
quarter, as reported by NASDAQ National Market System). In making this
calculation, the registrant has assumed, without admitting for any purpose,
that all directors and executive officers of the registrant, and no other
person, are affiliates.
The number of shares of the registrant's common stock, par value $.01 per
share, (the "Common Stock") outstanding as of the close of business on
March 3, 2003 was 15,725,977.
Documents Incorporated by Reference
Portions of the following documents are incorporated by reference in this
Form 10-K as indicated herein:
Part of 10-K into
Document which incorporated
-------- ------------------
2002 Annual Report to Shareholders Part II
Proxy Statement relating to Part III
Landstar System, Inc.'s Annual
Meeting of Shareholders
2
<PAGE>
LANDSTAR SYSTEM, INC.
2002 Annual Report on Form 10-K
Table of Contents
<TABLE>
<CAPTION>
Part I
Page
----
<S> <C>
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
Part III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 18
Item 13. Certain Relationships and Related Transactions 18
Item 14. Controls and Procedures 18
Part IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 18
Signatures 20
Index to Exhibits 23
</TABLE>
3
<PAGE>
Part I
Item 1. - Business
General
Landstar System, Inc. was incorporated in January 1991 under the laws of the
State of Delaware and acquired all of the capital stock of its predecessor,
Landstar System Holdings, Inc. ("LSHI") on March 28, 1991. LSHI owns directly
or indirectly all of the common stock of Landstar Ranger, Inc. ("Landstar
Ranger"), Landstar Inway, Inc. ("Landstar Inway"), Landstar Ligon, Inc.
("Landstar Ligon"), Landstar Gemini, Inc. ("Landstar Gemini"), Landstar Carrier
Services, Inc., Landstar Logistics, Inc. ("Landstar Logistics"), Landstar
Express America, Inc. ("Landstar Express America"), Landstar Contractor
Financing, Inc. ("LCFI"), Landstar Capacity Services, Inc., Risk Management
Claim Services, Inc. ("RMCS"), Signature Technology Services, Inc. ("STSI")
and Signature Insurance Company ("Signature"). Landstar Ranger, Landstar Inway,
Landstar Ligon, Landstar Gemini, Landstar Logistics and Landstar Express
America are collectively herein referred to as Landstar's "Operating
Subsidiaries." Landstar System, Inc., LSHI, LCFI, RMCS, STSI, Signature and the
Operating Subsidiaries are collectively referred to herein as "Landstar" or the
"Company," unless the context otherwise requires. The Company's principal
executive offices are located at 13410 Sutton Park Drive South, Jacksonville,
Florida 32224 and its telephone number is (904) 398-9400. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K as soon as
reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission. The Company's website is www.landstar.com.
Historical Background
In March 1991, Landstar acquired LSHI in a buy-out organized by Kelso &
Company, Inc. ("Kelso"). Investors in the acquisition included Kelso Investment
Associates IV L.P. ("KIA IV"), an affiliate of Kelso, ABS MB Limited
Partnership, an affiliate of DB Alex. Brown LLC (formerly known as Alex.
Brown & Sons Incorporated), and certain management employees of Landstar
and its subsidiaries. In March 1993, Landstar completed a recapitalization
which consisted of three principal components: (i) an initial public offering
of Common Stock, (ii) the retirement of all its outstanding 14% Senior
Subordinated Notes, and (iii) the refinancing of the Company's then existing
senior debt facility with a senior bank credit agreement. In October 1993, the
Company completed a secondary public offering. Immediately subsequent to the
offering, KIA IV no longer owned any shares of Landstar Common Stock, and
affiliates of DB Alex. Brown LLC retained approximately 1% of the Common
Stock outstanding.
4
<PAGE>
In March 1997, Landstar formed Signature, a wholly-owned offshore insurance
subsidiary. Signature reinsures certain property, casualty and occupational
accident risks of certain Independent Contractors (as defined below) who have
contracted to haul freight for Landstar. In addition, Signature provides
certain property and casualty insurance directly to Landstar's Operating
Subsidiaries.
On August 22, 1998, Landstar Poole, Inc., formerly a wholly-owned operating
subsidiary of LSHI that comprised the entire company-owned tractor segment of
the Company, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Accordingly, the financial results of this segment
have been reported as discontinued operations.
On July 17, 2002, the Company declared a two-for-one stock split effected in
the form of a 100% stock dividend distributed on August 12, 2002 to
stockholders of record on August 2, 2002.
Description of Business
Landstar, a non-asset based provider of transportation capacity, provides
transportation services to shippers throughout the United States and, to
a lesser extent, between the United States, Canada and Mexico. These business
services, which emphasize safe transportation, information coordination and
customer service, are delivered through a network of independent commission
sales agents and third party capacity providers linked together by a series of
technological applications. These third party capacity providers consist of
independent contractors who provide truck capacity to the Company under
exclusive lease arrangements (the "Independent Contractors"), unrelated
trucking companies, airlines and railroads. Through this network of agents and
capacity providers, Landstar operates a $1.5 billion transportation services
business throughout North America.
Landstar provides transportation services to a variety of industries, including
iron and steel, automotive products, paper, lumber and building products,
aluminum, chemicals, foodstuffs, heavy machinery, ammunition and explosives,
and military hardware. Landstar's transportation services include a full array
of truckload transportation utilizing a wide range of specialized equipment
including dry vans of various sizes, flatbeds, including drop decks and light
specialty trailers, and temperature-controlled vans and containers, dedicated
contract and logistics solutions, including freight optimization and less than
truckload freight consolidations, truck brokerage and expedited land and air
delivery of time-critical freight.
5
<PAGE>
The Company has three reportable business segments. These are the carrier,
multimodal and insurance segments. The following table provides financial
information relating to the Company's reportable business segments as of and
for the fiscal years ending 2002, 2001 and 2000 (dollars in thousands):
<TABLE>
<CAPTION> Fiscal Year
------------------------------------
2002 2001 2000
----- ----- -----
<S> <C> <C> <C>
Revenue from unaffiliated customers:
Carrier segment $1,178,263 $1,098,268 $1,117,042
Multimodal segment 300,716 270,849 277,087
Insurance segment 27,576 23,654 24,363
Internal revenue:
Carrier segment $ 23,703 $ 28,587 $ 34,669
Multimodal segment 2,483 2,367 1,241
Insurance segment 29,860 27,313 21,919
Operating income:
Carrier segment $ 87,777 $ 76,105 $ 88,507
Multimodal segment 7,793 5,343 9,346
Insurance segment 22,754 30,644 24,464
Other (34,643) (35,706) (39,704)
Identifiable assets:
Carrier segment $ 241,068 $ 234,164 $ 256,690
Multimodal segment 59,571 47,795 54,294
Insurance segment 70,198 46,440 33,267
Other 29,911 36,252 26,111
</TABLE>
The carrier segment consists of Landstar Ranger, Landstar Inway, Landstar
Ligon and Landstar Gemini. The carrier segment provides truckload
transportation for a wide range of general commodities primarily over irregular
routes utilizing a fleet of dry and specialty vans and unsided trailers,
including flatbed, drop deck and specialty. It also provides short-to-long haul
movement of containers by truck, dedicated power-only truck capacity and truck
brokerage. The carrier segment markets its services primarily through
independent commission sales agents and utilizes tractors provided by
Independent Contractors and other third party truck capacity providers.
6
<PAGE>
The nature of the carrier segment business is such that a significant
portion of its operating costs varies directly with revenue. At December
28, 2002, the carrier segment operated a fleet of 8,072 tractors, provided by
7,074 Independent Contractors, and 14,719 trailers. Approximately 5,514 of
the trailers available to the carrier segment are provided by Independent
Contractors, 4,724 are leased by the Company at rental rates that vary with
the revenue generated by the trailer, 4,152 are owned by the Company and 329
are rented on a short-term basis from trailer rental companies. In addition,
the Company utilizes over 10,000 qualified other third party truck capacity
providers who provide additional tractor and trailer capacity. The carrier
segment's network of more than 800 independent commission sales agents provide
almost 1,000 sales locations. Independent commission sales agents in the
carrier segment receive a commission generally between 5% and 8% of the revenue
they generate if the load is hauled by an Independent Contractor and a variable
percent of the revenue they generate if hauled by a third party trucking
company. The use of Independent Contractors and other third party capacity
providers enables the carrier segment to utilize a large fleet of revenue
equipment while minimizing capital investment and fixed costs, thereby
enhancing return on investment. Independent Contractors who provide a tractor
receive a percentage of the revenue generated for the freight hauled and a
larger percentage of such revenue for providing both a tractor and a trailer.
Other third party truck capacity providers are paid a negotiated rate for each
load they haul.
The multimodal segment is comprised of Landstar Logistics and Landstar Express
America. Transportation services provided by the multimodal segment include the
arrangement of intermodal moves, contract logistics, truck brokerage and
emergency and expedited ground and air freight. The multimodal segment markets
its services through independent commission sales agents and utilizes capacity
provided by Independent Contractors, other third party truck capacity
providers, railroads and air cargo carriers. Multimodal independent commission
sales agents generally receive a percentage of the gross profit, defined as
revenue less the cost of purchased transportation, from each load they
generate. Independent Contractors who provide truck capacity to the multimodal
segment are compensated based on a percentage of the revenue generated by the
haul depending on the type and timing of the shipment. Other third party truck
capacity providers are paid a negotiated rate for each load they haul.
Railroads and air cargo carriers receive a fixed amount per load. The nature
of the multimodal segment business is such that a significant portion of its
operating costs also varies directly with revenue. At December 28, 2002,
the multimodal segment operated a fleet of 330 trucks, provided by
approximately 291 Independent Contractors. Multimodal segment Independent
Contractors primarily provide cargo vans and straight trucks that are utilized
for emergency and expedited freight services. The multimodal segment's
network of approximately 100 independent commission sales agents provide over
140 sales locations.
The insurance segment is comprised of Signature, a wholly-owned offshore
insurance subsidiary and RMCS. The insurance segment provides risk and claims
management services to Landstar's Operating Subsidiaries. In addition, it
reinsures certain property, casualty and occupational accident risks of
certain Independent Contractors who have contracted to haul freight for
Landstar and provides certain property and casualty insurance directly to
Landstar's Operating Subsidiaries.
Landstar's business strategy is to be a non asset based provider of
transportation capacity offering high quality, specialized transportation
services to service-sensitive customers. Landstar focuses on providing
transportation services which emphasize customer service and information
coordination among its independent commission sales agents, customers and
capacity providers, rather than the volume-driven approach of generic dry
van carriers. Landstar intends to continue developing appropriate systems
and technologies that offer integrated transportation solutions to meet the
total transportation needs of its customers.
7
<PAGE>
Management believes that the Company's overall size, geographic coverage,
equipment and service capability offer the Company significant competitive
marketing and operating advantages. These advantages allow the Company to meet
the needs of even the largest shippers and thereby qualify it as a "core
carrier." Increasingly, the larger shippers are substantially reducing the
number of authorized carriers in favor of a small number of core carriers whose
size and diverse service capability enable these core carriers to satisfy most
of the shippers' transportation needs. Examples of national account customers
include the U.S. Department of Defense and many of the companies included in
the Fortune 500.
Management believes the following factors are particularly significant
to the Company's operations:
TECHNOLOGY. Management believes leadership in the development and application
of technology is an ongoing part of providing high quality service at
competitive prices. Landstar manages its technology programs centrally through
its information services department.
The Company's information technology systems used in connection with its
operations are centralized in Jacksonville, FL and, to a lesser extent, in
Rockford, IL. Landstar relies in the regular course of its business on the
proper operation of its information technology systems. Any significant
disruption or failure of its technology systems could significantly disrupt
the Company's operations and impose significant costs on the Company.
DIVERSITY OF SERVICES OFFERED. The Company offers its customers a wide range
of transportation services through the Operating Subsidiaries, including
a fleet of diverse trailing equipment and extensive geographic coverage.
Examples of the specialized services offered include a large fleet of flatbed
trailers, multi-axle trailers capable of hauling extremely heavy or oversized
loads, drivers certified to handle ammunition and explosive shipments for the
U.S. Department of Defense, emergency and expedited surface and air cargo
services and intermodal capability with railroads and, to a lesser extent,
steamship lines.
The following table illustrates the diversity of this equipment as of
December 28, 2002:
<TABLE>
<CAPTION>
<S> <C>
Trailers:
Vans 10,445
Temperature-Controlled 200
Flatbeds, Including Drop Decks and Low Boys 2,198
Other Specialized 1,876
------
Total 14,719
======
</TABLE>
8
<PAGE>
MARKETING NETWORK. Management believes the Company has more independent
commissioned sales agents than any other domestic truckload carrier.
Landstar's network of over 1,100 independent commission sales agent
locations provides the Company with regular contact with shippers
at the local level and the capability to be highly responsive to shippers'
changing needs. The agent network also enables Landstar to be responsive
both in providing specialized equipment to both large and small shippers and
in providing capacity on short notice from the Company's large fleet to high-
volume shippers. Through its agent network, the Company believes it offers
smaller shippers a level of service comparable to that typically enjoyed only
by larger customers. Examples of services that Landstar is able to make
available through the agent network to smaller shippers include the ability to
provide transportation services on short notice (often within hours from
notification to time of pick-up), multiple pick-up and delivery points,
electronic data interchange capability and access to specialized equipment. In
addition, a number of the Company's agents specialize in certain types of
freight and transportation services (such as oversized or heavy loads). An
agent in the carrier segment is typically paid a percentage of the revenue
generated through that agent, with volume-based incentives. An agent in the
multimodal segment is typically paid a contractually agreed-upon percentage of
the gross profit, defined as revenue less the cost of purchased transportation,
generated through that agent. During 2002, 384 agents generated revenue for
Landstar of at least $1 million each, or approximately $1.3 billion of
Landstar's total revenue and one agent generated over $84 million of Landstar's
total revenue. Management believes that the majority of the agents who generate
revenue of $1 million or more have chosen to represent Landstar exclusively.
The typical Landstar agent maintains a relationship with a number of shippers
and services these shippers by providing a base of operations for the
Company's Independent Contractors and other third party capacity providers.
Historically, Landstar has experienced very limited agent turnover among its
larger-volume agents. The Operating Subsidiaries emphasize programs to support
the agents' operations and to establish pricing parameters. Although the
primary relationship with the shipper is with the agent and not the Company,
each Operating Subsidiary contracts directly with customers and generally
assumes the credit risk and liability for freight losses or damages.
The independent commission sales agents are responsible for locating freight,
making that freight available to the Company's capacity providers and
coordinating the transportation of the freight with customers and capacity
providers. The carrier segment's independent commission sales agents
use the Company's Landstar Electronic Administrative Dispatch System (LEADS)
software program which enables its independent commission sales agents to enter
available freight, dispatch capacity and process most administrative procedures
and then communicate that information to Landstar and its capacity providers
via the worldwide web. The multimodal segment's independent commission sales
agents use other Landstar proprietary software to process customer shipments
and communicate the necessary information to third party capacity providers
and Landstar. The Company's web-based available freight and truck information
system provides a listing of available trucks to the Company's independent
commission sales agents.
The carrier segment and multimodal segment hold regular regional agent meetings
for their independent commission sales agents and Landstar holds an annual
company-wide agent convention.
9
<PAGE>
Although the Company competes with motor carriers and other parties for the
services of independent commission sales agents, Landstar, as noted above, has
historically experienced very limited turnover among its larger-volume agents.
However, Landstar's contracts with its agents are generally terminable
upon 10 to 30 days notice by either party and do not restrict the ability
of a former agent to compete with Landstar following any such termination.
The loss of some of the Company's larger-volume agents or significant
decrease in volume from Landstar's larger agents could have a material
adverse effect on Landstar including its results of operations and revenue.
CAPACITY. The Company relies exclusively on independent third parties for
its hauling capacity. These third party capacity providers consist of
Independent Contractors, unrelated trucking companies, airlines and railroads.
INDEPENDENT CONTRACTORS. Management believes the Company has the largest
fleet of truckload Independent Contractors in the United States. This provides
marketing, operating, safety, recruiting, retention and financial advantages to
the Company. The Company's Independent Contractors are compensated based on a
fixed percentage of the revenue generated from the freight they haul. This
percentage generally ranges from 60% to 70% where the Independent Contractor
provides only a tractor and from 75% to 79% where the Independent Contractor
provides both a tractor and a trailer. The Independent Contractor must pay
substantially all of the expenses of operating his/her equipment, including
driver wages and benefits, fuel, physical damage insurance, maintenance,
highway use taxes and debt service.
The Company maintains an internet site through which Independent Contractors
can view a complete listing of all the Company's available freight, allowing
them to consider size, origin and destination when planning trips.
The number of trucks provided by Independent Contractors fluctuates daily as a
result of truck recruiting and truck terminations. Although the Company
experienced slightly improved truck turnover results during 2002, total
truck count decreased compared to the prior year due to a reduction in
the number of trucks recruited in 2002 compared to 2001. Landstar's truck
turnover ratio was approximately 56% in 2002 compared to 60% in 2001. A
significant portion of this turnover was attributable to Independent
Contractors who had been Independent Contractors with the Company for less
than one year. Management believes that factors that have historically
favorably impacted turnover include the Company's extensive agent network, the
Company's programs to reduce the operating costs of its Independent Contractors
and Landstar's reputation for quality, service and reliability. Management
believes that a reduction in the amount of available freight may cause an
increase in truck turnover.
The Landstar Contractors' Advantage Purchasing Program leverages Landstar's
purchasing power to provide discounts to eligible Independent Contractors when
they purchase equipment, fuel, tires and other items. In addition, LCFI
provides a source of funds at competitive interest rates to the Independent
Contractors to purchase trailing equipment and mobile communication equipment.
10
<PAGE>
OTHER THIRD PARTY TRUCK CAPACITY. The Company maintains a database of over
10,000 qualified third party truck capacity providers who provide additional
truck hauling capacity to the Company. The Company recruits, qualifies,
establishes contracts, tracks safety ratings and service records and generally
maintains the relationships with these third party trucking companies. In
addition to augmenting the Company's capability during periods of extraordinary
demand and traffic lane imbalance, the use of third party carriers enables the
Company to pursue different types and quality of freight such as
temperature-controlled and short-haul traffic that would generally not
be handled by the Company's Independent Contractors.
THIRD PARTY RAIL AND AIR CAPACITY. The Company maintains contractual
relationships with various railroads and air cargo capacity providers. These
relationships allow the Company to pursue the freight best serviced by these
forms of transportation capacity.
Landstar benefits from its use of capacity provided by its Independent
Contractors and other third party capacity providers, which allows the Company
to maintain a lower level of capital investment, resulting in lower fixed
costs. Historically, the margin generated from freight hauled by Independent
Contractors has been greater than from freight hauled by other third party
capacity providers.
The Company competes with motor carriers and other third parties for the
services of third party capacity providers. A significant decrease in available
capacity provided by either the Company's Independent Contractors or other
third party capacity providers could have a material adverse effect on
Landstar including its results of operations and its revenue.
A significant change in the mix of freight hauled by Independent Contractors,
on the one hand, and other third party capacity providers, on the other hand,
could have a material effect on Landstar's results of operations.
CORPORATE SERVICES. Management believes that significant advantages result
from the collective expertise and corporate services afforded by Landstar's
corporate management. The primary services provided are:
safety purchasing
strategic planning human resource management
technology and management information systems finance
legal accounting, budgeting and taxes
operator and equipment compliance quality programs
risk management insurance services
Competition
Landstar competes primarily in the transportation services industry.
The transportation services industry is extremely competitive and fragmented.
Landstar competes primarily with truckload carriers, intermodal
transportation service providers, railroads, less-than-truckload carriers,
third party broker carriers and other non-asset based transportation service
providers.
11
<PAGE>
Management believes that competition for the freight transported by the Company
is based primarily on service and efficiency and, to a lesser degree, on
freight rates alone. Management believes that Landstar's overall size and
availability of a wide range of equipment, together with its geographically-
dispersed local independent agent network, present the Company with significant
competitive advantages over many transportation service providers.
The Company also competes with motor carriers for the services of
independent contractors and with motor carriers and other third parties for the
services of independent commission sales agents, contracts with whom are
typically terminable upon 10 to 30 day notice.
INSURANCE AND CLAIMS
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. Landstar retains liability for
each individual commercial trucking claim up to $5,000,000 per occurrence.
For commercial trucking claims incurred prior to May 1, 2001, Landstar
retains liability up to $1,000,000 per occurrence. To reduce its
exposure to unladen truckers liability claims (claims incurred while a vehicle
is being operated without a trailer attached or is being operated with an
attached trailer which does not contain or carry any cargo), Landstar requires
its Independent Contractors to maintain unladen truckers liability coverage of
$1,000,000 per occurrence. Under the Company's unladen truckers liability
program, Independent Contractors purchase unladen truckers liability coverage
from a third party insurance company. Signature then reinsures this unladen
truckers liability coverage for Independent Contractors who participate in the
Company's unladen program up to $1,000,000 per occurrence. For unladen claims
incurred prior to January 1, 2002, Landstar retains liability up to $25,000
per occurrence. The Company also retains liability for each general liability
claim up to $1,000,000, $250,000 for each workers' compensation claim and
$250,000 for each cargo claim. The Company's exposure to liability associated
with accidents incurred by other third party capacity providers who haul
freight on behalf of the Company is reduced by various factors including the
extent to which they maintain their own insurance coverage. A material increase
in the frequency or severity of accidents, cargo or workers' compensation
claims or the unfavorable development of existing claims could be expected to
materially adversely affect Landstar's results of operations.
POTENTIAL CHANGES IN FUEL TAXES
From time to time, various legislative proposals are introduced to increase
federal, state, or local taxes, including taxes on motor fuels. The Company
cannot predict whether, or in what form, any increase in such taxes applicable
to the transportation services provided by the Company will be enacted and, if
enacted, whether or not the Company will be able to reflect the increases in
prices to customers. Competition from other transportation service companies
including those that provide non-trucking modes of transportation and
intermodal transportation would be likely to increase if state or federal taxes
on fuel were to increase without a corresponding increase in taxes imposed upon
other modes of transportation.
12
<PAGE>
INDEPENDENT CONTRACTOR STATUS
From time to time, various legislative or regulatory proposals are introduced
at the federal or state levels to change the status of independent contractors'
classification to employees for either employment tax purposes (withholding,
social security, medicare and unemployment taxes) or other benefits
available to employees. Currently, most individuals are classified as
employees or independent contractors for employment tax purposes based on 20
"common-law" factors rather than any definition found in the Internal Revenue
Code or Internal Revenue Service regulations. In addition, under Section 530
of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an
individual as an independent contractor for employment tax purposes if they
have been audited without being told to treat similarly situated workers as
employees, if they have received a ruling from the Internal Revenue Service
or a court decision affirming their treatment, or if they are following a
long-standing recognized practice.
The Company classifies all of its Independent Contractors and independent
commissioned sales agents as independent contractors for all purposes,
including employment taxes and employee benefit purposes. Although
management is unaware of any proposals currently pending that would
change the employee/independent contractor classification of Independent
Contractors or independent commission sales agents currently doing business
with the Company, the costs associated with potential changes, if any, in the
employee/independent contractor classification could adversely affect
Landstar's results of operations and revenue if Landstar were unable to reflect
them in its fee arrangements with the Independent Contractors and independent
commission sales agents or in the prices charged to its customers.
REGULATION
Each of the Operating Subsidiaries is a motor carrier which is regulated by
the United States Department of Transportation ("DOT") and by various state
agencies. The DOT has broad powers, generally governing activities such as the
regulation of, to a limited degree, motor carrier operations, rates, accounting
systems, periodic financial reporting and insurance. Subject to federal and
state regulatory authorities or regulation, the Company may transport most
types of freight to and from any point in the United States over any route
selected by the Company.
The trucking industry is subject to possible regulatory and legislative changes
(such as increasingly stringent environmental and/or safety/security
regulations or limits on vehicle weight and size) that may affect the economics
of the industry by requiring changes in operating practices or by changing the
demand for common or contract carrier services or the cost of providing
truckload services.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. All of the Company's drivers are required to have
national commercial driver's licenses and are subject to mandatory drug and
alcohol testing. The DOT's national commercial driver's license and drug and
alcohol testing requirements have not adversely affected the availability of
qualified drivers to the Company.
13
<PAGE>
At December 28, 2002, approximately 43 Landstar Ranger drivers were
represented by the International Brotherhood of Teamsters (the "Teamsters").
As a result of its withdrawal from the various Teamster-sponsored pension
plans, payment of withdrawal liability to one of the Teamster pension funds
and the terms of the current collective bargaining agreement with the
Teamsters, Landstar Ranger no longer participates in any multi-employer
pension plans.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March are typically
lower than the quarters ending in June, September and December.
Employees
As of December 28, 2002, the Company and its subsidiaries employed
1,224 individuals. Approximately 43 Landstar Ranger drivers (out of a total
of approximately 4,500) are members of the International Brotherhood of
Teamsters. The Company considers relations with its employees to be good.
Item 2. - Properties
The Company owns or leases various properties in the U.S. for the Company's
operations and administrative staff that support its independent commission
sales agents, Independent Contractors and other third party capacity providers.
The carrier segment's primary facilities are located in Jacksonville, Florida
and Rockford, Illinois. The multimodal segment's primary facilities are located
in Jacksonville, Florida. In addition, the Company's corporate headquarters
are located in Jacksonville, Florida. The Rockford, Illinois facility of the
carrier segment is owned by the Company. All other primary facilities are
leased.
Management believes that Landstar's owned and leased properties are adequate
for its current needs and that leased properties can be retained or replaced
at an acceptable cost.
Item 3. - Legal Proceedings
On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc.
v. Landstar System, Inc., Landstar Logistics, Inc. and Ford Motor Co., Inc. in
Federal District Court in Mobile, Alabama. The suit alleges breach
of contract and misrepresentation against Landstar and Landstar Logistics and
certain other causes of action arising out of a contract between Landstar
Logistics and the plaintiff involving a trans-Gulf of Mexico roll-on/roll-off
shipping venture developed by the plaintiff. The complaint and discovery
developed after the filing of the suit indicate that plaintiff's
principal claim is that Landstar and Landstar Logistics breached a duty under
the contract to use "best efforts" to aid in the arrangement of freight for
plaintiff's vessel and that Landstar and Landstar Logistics misrepresented
material facts which induced Plaintiff to enter into the contract with
Landstar Logistics. The suit makes claim for $25,000,000 for damages for
breach of contract and $50,000,000 punitive and other damages related to the
misrepresentation counts. The Company has filed motions for summary judgment
with the court seeking, in addition to a judgment in its favor, to dismiss
Landstar from the litigation, to limit the amount of damages obtainable by
the plaintiff, to preclude fraud and other theories upon which plaintiff
seeks to obtain damages, and to exclude certain evidence concerning damages
sought to be introduced at trial by plaintiff, among other things. Subject to
the outcome of these motions, which is anticipated in March 2003, discovery
has been substantially completed in this matter, and the Company anticipates
that the matter will be tried in April of 2003.
14
<PAGE>
The Company believes it has meritorious defenses to this litigation and intends
to defend it vigorously. The Company also believes that if this litigation were
determined adversely to it, the liability of the Company, exclusive of any
available insurance recoveries, would not be reasonably likely to have a
material adverse effect on the financial condition of the Company but that it
could have a material adverse effect on the results of operations in a given
quarter or year. The Company has notified its third-party insurance carrier
that it believes that a portion of the claims made in this lawsuit are covered
under insurance provided by that carrier, and the carrier has agreed to pay the
fees and expenses and to participate in the defense of this litigation, subject
to a reservation of rights. The Company also intends to pursue its rights with
respect to this coverage vigorously. No assurances can be given as to the
outcome of this litigation or any related matter, however.
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc.
("OOIDA") and six individual Independent Contractors filed a putative class
action suit in the U.S. Court in Jacksonville, Florida, against the Company.
The suit alleges that certain aspects of Landstar's motor carrier's leases with
owner operators violate the federal leasing regulations. OOIDA seeks injunctive
relief, damages and attorneys' fees. On December 17, 2002, the Company filed
a Motion to Dismiss and a Motion to Stay and Compel Arbitration with respect
to all of the leases that contain arbitration clauses. Landstar believes it has
meritorious defenses to this litigation and intends to defend it vigorously.
Landstar also believes that it treats its Independent Contractors fairly and
in a manner which reflects the important role they play in the Company's
operations.
The Company is routinely a party to other litigation incidental to its
business, primarily involving claims for personal injury and property damage
incurred in the transportation of freight. The Company maintains insurance
which covers liability amounts in excess of retained liabilities from personal
injury and property damages claims.
Item 4. - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2002.
15
<PAGE>
Part II
Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is quoted through the National Association of
Securities Dealers, Inc. National Market System (the "NASDAQ National Market
System") under the symbol "LSTR." The following table sets forth the high and
low reported sale prices for the Common Stock as quoted through the NASDAQ
National Market System for the periods indicated. All historical share-related
financial information presented herein has been restated to reflect a
two-for-one stock split effected in the form of a 100% stock dividend
distributed on August 12, 2002 to stockholders of record on August, 2, 2002.
<TABLE>
<CAPTION>
Calendar Period 2002 Market Price 2001 Market Price
--------------- ----------------- -----------------
<S> <C> <C> <C> <C>
High Low High Low
First Quarter $ 47.565 $ 35.926 $ 36.438 $ 27.625
Second Quarter 55.150 44.500 36.000 31.250
Third Quarter 57.150 42.860 40.570 30.000
Fourth Quarter 59.950 41.270 37.920 30.250
</TABLE>
The reported last sale price per share of the Common Stock as quoted through
the NASDAQ National Market System on March 3, 2003 was $54.17 per share. As
of such date, Landstar had 15,725,977 shares of Common Stock outstanding. As
of March 10, 2003, the Company had 68 stockholders of record of its Common
Stock. However, the Company estimates that it has a significantly greater
number of stockholders because a substantial number of the Company's
shares are held by brokers or dealers for their customers in street name.
The Company has not paid any cash dividends on the Common Stock within the past
three years and does not intend to pay dividends on the Common Stock for the
foreseeable future. The declaration and payment of any future dividends will
be determined by the Company's Board of Directors, based on Landstar's results
of operations, financial condition, cash requirements, certain corporate law
requirements and other factors deemed relevant by the Board of Directors.
Item 6. - Selected Financial Data
The information required by this Item is set forth under the caption "Selected
Consolidated Financial Data" in Exhibit 13 attached hereto, and is
incorporated by reference in this Annual Report on Form 10-K. This
information is also included on page 50 of the Company's 2002 Annual Report to
Shareholders.
16
<PAGE>
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Exhibit 13 attached hereto, and is incorporated by reference in
this Annual Report on Form 10-K. This information is also included on pages
24 to 33 of the Company's 2002 Annual Report to Shareholders.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company has a credit agreement with a syndicate of banks and JPMorgan
Chase Bank, as the administrative agent, (the "Third Amended and
Restated Credit Agreement") that provides $175,000,000 of borrowing
capacity. Borrowings under the Third Amended and Restated Credit Agreement
bear interest at rates equal to, at the option of Landstar, either (i) the
greatest of (a) the prime rate as publicly announced from time to time by
JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory
reserves and FDIC assessment costs plus 1% and (c) the federal funds
effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan
Chase Bank in the Eurodollar market for amounts and periods comparable to
the relevant loan plus a margin that is determined based on the level of the
Company's Leverage Ratio, as defined in the Third Amended and Restated Credit
Agreement. The margin is subject to an increase of .125% if the aggregate
amount outstanding under the Third Amended and Restated Credit Agreement
exceeds 50% of the total borrowing capacity. As of December 28, 2002, the
weighted average interest rate on borrowings outstanding was 2.27%. During
fiscal 2002, the average outstanding balance under the Third Amended and
Restated Credit Agreement was $81,712,000. Based on the borrowing rates
in the Third Amended and Restated Credit Agreement and the repayment
terms, the fair value of the outstanding borrowings as of
December 28, 2002 was estimated to approximate carrying value.
The Third Amended and Restated Credit Agreement expires on
January 5, 2005. The amount outstanding on the Third Amended and Restated
Credit Agreement is payable upon the expiration of the Third Amended
and Restated Credit Agreement.
The Company's obligations under the Third Amended and Restated Credit Agreement
are guaranteed by all but one of LSHI's subsidiaries.
Item 8. - Financial Statements and Supplementary Data
The information required by this Item is set forth under the captions
"Consolidated Balance Sheets," "Consolidated Statements of Income,"
"Consolidated Statements of Cash Flows," "Consolidated Statements of Changes
in Shareholders' Equity," "Notes to Consolidated Financial Statements,"
"Independent Auditors' Report" and "Quarterly Financial Data" in Exhibit 13
attached hereto, and are incorporated by reference in this Annual Report on
Form 10-K. This information is also included on pages 34 through 49 of the
Company's 2002 Annual Report to Shareholders.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
<PAGE>
Part III
Item 10. - Directors and Executive Officers of the Registrant
The information required by this Item concerning the Directors (and nominees
for Directors) and Executive Officers of the Company is set forth under the
captions "Election of Directors," "Directors of the Company," "Information
Regarding Board of Directors and Committees," and "Executive Officers of the
Company" on pages 2 through 8, and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" on page 19 of the Company's definitive Proxy
Statement for its annual meeting of shareholders filed with the Securities and
Exchange Commission pursuant to Regulation 14A, and is incorporated herein by
reference.
Item 11. - Executive Compensation
The information required by this Item is set forth under the captions
"Compensation of Directors and Executive Officers," "Summary Compensation
Table," "Fiscal Year-End Option Values," "Report of the Compensation
Committee on Executive Compensation," "Performance Comparison" and
"Key Executive Employment Protection Agreements" on pages 9 through 11 and 13
through 16 of the Company's definitive Proxy Statement for its annual meeting
of shareholders filed with the Securities and Exchange Commission pursuant to
Regulation 14A, and is incorporated herein by reference.
Item 12. - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item is set forth under the caption "Security
Ownership by Management and Others" on pages 17 through 19 and "Equity
Compensation Plan Information" on page 12 of the Company's definitive Proxy
Statement for its annual meeting of shareholders filed with the Securities and
Exchange Commission pursuant to Regulation 14A, and is incorporated herein by
reference.
Item 13. - Certain Relationships and Related Transactions
The information required by this Item is set forth under the caption
"Indebtedness of Management" on pages 12 and 13 of the Company's definitive
Proxy Statement for its annual meeting of shareholders filed with the
Securities and Exchange Commission pursuant to Regulation 14A, and is
incorporated herein by reference.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation,
the CEO and CFO have concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. Subsequent to the date of such evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls.
Part IV
Item 15. - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Financial statements of the Company and related notes thereto, together with
the report thereon of KPMG LLP dated February 5, 2003, are in Exhibit 13
attached hereto, and are incorporated by reference in this Annual Report on
Form 10-K. This information is also included on pages 34 through 48 of the
Company's 2002 Annual Report to Shareholders.
18
<PAGE>
(2) Financial Statement Schedules
The report of the Company's independent public accountants with respect to the
financial statement schedules listed below appears on page 26 of this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
Schedule Number Description Page
- --------------- ----------- ----
<S> <C> <C>
I Condensed Financial Information of Registrant
Parent Company Only Balance Sheet Information S-1
I Condensed Financial Information of Registrant
Parent Company Only Statement of Income Information S-2
I Condensed Financial Information of Registrant
Parent Company Only Statement of Cash
Flows Information S-3
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 28, 2002 S-4
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 29, 2001 S-5
II Valuation and Qualifying Accounts
For the Fiscal Year Ended December 30, 2000 S-6
</TABLE>
All other financial statement schedules not listed above have been omitted
because the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or required.
(3) Exhibits
(a) The response to this portion of Item 15 is submitted as a separate
section of this report (see "Exhibit Index").
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO
SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR
SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 13410 SUTTON PARK DRIVE SOUTH,
JACKSONVILLE, FLORIDA 32224.
(b) The Company's Form 8-K filed with the Securities and Exchange Commission
on November 1, 2002 contained the Company's Principal Executive Officer's
and Principal Financial Officer's certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LANDSTAR SYSTEM, INC.
By: /s/ Jeffrey C. Crowe
----------------------------------------
Jeffrey C. Crowe
Chairman of the Board
and Chief Executive Officer
By: /s/ Robert C. LaRose
----------------------------------------
Robert C. LaRose
Vice President, Chief Financial Officer
and Secretary
Date: March 10, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jeffrey C. Crowe Chairman of the Board and Chief March 10, 2003
- ------------------- Executive Officer; Principal
Jeffrey C. Crowe Executive Officer
/s/ Henry H. Gerkens Director, President and Chief March 10, 2003
- ------------------- Operating Officer
Henry H. Gerkens
/s/ Robert C. LaRose Vice President, Chief Financial March 10, 2003
- ------------------- Officer and Secretary; Principal
Robert C. LaRose Accounting Officer
* Director March 10, 2003
- -------------------
David G. Bannister
* Director March 10, 2003
- -------------------
Ronald W. Drucker
* Director March 10, 2003
- -------------------
Merritt J. Mott
* Director March 10, 2003
- -------------------
William S. Elston
* Director March 10, 2003
- -------------------
Diana M. Murphy
/s/ Robert C. LaRose Attorney In Fact *
- -------------------
By: Robert C. LaRose
20
<PAGE>
CERTIFICATIONS
I, Jeffrey C. Crowe, certify that:
1. I have reviewed this annual report on Form 10-K of Landstar
System, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 10, 2003
/s/ Jeffrey C. Crowe
_______________________
Jeffrey C. Crowe
Chairman of the Board and
Chief Executive Officer
21
<PAGE>
CERTIFICATIONS
I, Robert C. LaRose, certify that:
1. I have reviewed this annual report on Form 10-K of
Landstar System, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
/s/ Robert C. LaRose
_______________________
Robert C. LaRose
Vice President, Chief
Financial Officer and Secretary
22
<PAGE>
EXHIBIT INDEX
Form 10-K for fiscal year ended 12/28/02
Exhibit No. Description
- ----------- -----------
(1) Plan of acquisition, reorganization, arrangement, liquidation
or succession
2.1 Asset Purchase Agreement by and between Landstar Poole, Inc.
as the seller, and Landstar System, Inc., as the guarantor, and Schneider
National, Inc., as the purchaser, dated as of July 15, 1998. (Incorporated by
reference to Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 27, 1998 (Commission File No. 0-21238))
(3) Articles of Incorporation and Bylaws:
3.1 Amended and Restated Certificate of Incorporation of the
Company dated February 9, 1993 and Certificate of Designation of Junior
Participating Preferred Stock. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1 (Registration No. 33-
57174))
3.2 The Company's Bylaws, as amended and restated on February 9,
1993. (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1. (Registration No. 33-57174))
(4) Instruments defining the rights of security holders,
including indentures:
4.1 Specimen of Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1
(Registration No. 33-57174))
4.2 Rights Agreement, dated as of February 10, 1993, between the
Company and Chemical Bank, as Rights Agent. (Incorporated by reference to
Exhibit 4.14 of Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-57174))
4.3 The Company agrees to furnish copies of any instrument defining
the rights of holders of long-term debt of the Company and its respective
consolidated subsidiaries that does not exceed 10% of the total assets of the
Company and its respective consolidated subsidiaries to the Securities and
Exchange Commission upon request.
23
<PAGE>
Exhibit Index (continued)
Form 10-K for fiscal year ended 12/28/02
Exhibit No. Description
- ----------- -----------
4.4 First Amendment of the Rights Agreement, dated December 22, 2000,
between the Company and Mellon Investor Services, LLC, as successor by merger
to Chemical Bank.
4.5 Third Amended and Restated Credit Agreement, dated December 20,
2001, among LSHI, Landstar, the lenders named therein and JPMorgan Chase
Bank as administrative agent (including exhibits and schedules thereto).
(Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K filed
on December 21, 2001 (Commission File No. 0-21238))
(10) Material Contracts:
10.1+ Landstar System, Inc. 1993 Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Registration Statement on Form
S-1. (Registration No. 33-67666))
10.2+ Form of Indemnification Agreement between the Company and each
of the directors and executive officers of the Company. (Incorporated by
reference to Exhibit 10.7 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-1. (Registration No. 33-57174))
10.3+ LSHI Management Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 25, 1993. (Commission File No. 0-21238))
10.4+ Landstar System, Inc. 1994 Director's Stock Option Plan.
(Incorporated by reference to Exhibit 99 to the Registrant's Registration
Statement on Form S-8 filed July 5, 1995. (Registration No. 33-94304))
10.5+ Form of Key Executive Employment Protection Agreement dated
January 30, 1998 between Landstar System, Inc. and each of Jeffrey C. Crowe,
Henry H. Gerkens, Robert C. LaRose, Gary W. Hartter and James R. Hertwig
(Incorporated by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 27, 1997 (Commission
File NO. 0-21238))
10.6+* Amendment to Key Executive Employment Protection Agreement,
dated August 7, 2002, between Landstar System, Inc. and Jeffrey C. Crowe.
10.7+* Amendment to Key Executive Employment Protection Agreement,
dated August 7, 2002, between Landstar System, Inc. and Henry H. Gerkens.
10.8+* Amendment to Key Executive Employment Protection Agreement,
dated August 7, 2002, between Landstar System, Inc. and Robert C. LaRose.
10.9+* Amendment to Key Executive Employment Protection Agreement,
dated August 7, 2002, between Landstar System, Inc. and Gary W. Hartter.
10.10+* Amendment to Key Executive Employment Protection Agreement,
dated August 7, 2002, between Landstar System, Inc. and James R. Hertwig.
24
<PAGE>
Exhibit Index (continued)
Form 10-K for fiscal year ended 12/28/02
Exhibit No. Description
- ----------- -----------
10.11+ Amendment to the Landstar System, Inc. 1993 Stock Option
Plan (Incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 27, 1997 (Commission File No. 0-21238))
10.12+ Form of Promissory Notes between the Company and certain
directors, executive officers and management of the Company.
10.13+ First Amendment to the Landstar System, Inc. 1994 Directors
Stock Option Plan
10.14+ Second Amendment to the Landstar System, Inc. 1994 Directors
Stock Option Plan
10.15+ Landstar System, Inc. 2002 Employee Stock Option Plan
(Incorporated by reference to Exhibit A to the Registrant's
Definitive Proxy Statement filed on March 22, 2002
(Commission File No. 0-21238))
10.16+ Landstar System, Inc. Executive Incentive Compensation Plan
(Incorporated by reference to Exhibit B to the Registrant's
Definitive Proxy Statement filed on March 22, 2002 (Commission File
No. 0-21238))
10.17+* Letter Agreement, dated July 2, 2002 from Jeffrey C. Crowe to
Henry H. Gerkens.
(11) Statement re: Computation of Per Share Earnings:
11.1* Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share
11.2* Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share
(13) Annual Report to Shareholders, Form 10-Q or Quarterly Report to
Shareholders:
13.1* Excerpts from the 2002 Annual Report to Shareholders
(21) Subsidiaries of the Registrant:
21.1* List of Subsidiary Corporations of the Registrant
(23) Consents of Experts and Counsel:
23.1* Consent of KPMG LLP as Independent Auditors of the Registrant
(24) Power of Attorney:
24.1* Powers of Attorney
___________________
+management contract or compensatory plan or arrangement
*Filed herewith.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Landstar System, Inc.:
Under date of February 5, 2003, we reported on the consolidated balance sheets
of Landstar System, Inc. and subsidiary as of December 28, 2002 and December
29, 2001, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the fiscal years ended December 28,
2002, December 29, 2001 and December 30, 2000, as contained in the 2002 annual
report to shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 2002. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedules
as listed in Item 15 (a)(2). These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Jacksonville, Florida
February 5, 2003
26
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEET INFORMATION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Dec. 28, Dec. 29,
2002 2001
-------- --------
<S> <C> <C>
Assets
- ------
Investment in Landstar System Holdings, Inc.,
net of advances $149,093 $117,440
-------- --------
Total assets $149,093 $117,440
======== ========
Liabilities and Shareholders' Equity
- -----------------------------------
Shareholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares, issued 16,337,506
and 13,328,834 shares $ 163 $ 133
Additional paid-in capital 2,609 75,036
Retained earnings 173,817 258,162
Cost of 554,879 and 5,241,841 shares of
common stock in treasury (26,306) (209,926)
Notes receivable arising from exercise of
stock options (1,190) (5,965)
-------- --------
Total shareholders' equity 149,093 117,440
-------- --------
Total liabilities and shareholders' equity $149,093 $117,440
======== ========
</TABLE>
S-1
27
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
Dec. 28, Dec. 29, Dec. 30,
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Equity in undistributed earnings
of Landstar System Holdings, Inc. $ 49,309 $ 42,838 $ 45,296
Income taxes 88 44 102
---------- ---------- ----------
Net income $ 49,221 $ 42,794 $ 45,194
========== ========== ==========
Earnings per common share (1) $ 3.05 $ 2.57 $ 2.57
========== ========== ==========
Diluted earnings per share (1) $ 2.94 $ 2.50 $ 2.52
========== ========== ==========
Average number of shares
outstanding:
Earnings per common share (1) 16,141,000 16,672,000 17,562,000
========== ========== ==========
Diluted earnings per share (1) 16,767,000 17,092,000 17,962,000
========== ========== ==========
</TABLE>
(1) All earnings per share amounts and average number of shares outstanding
have been restated to give retroactive effect to a two-for-one stock split
effected in the form of a 100% stock dividend declared July 17, 2002.
S-2
28
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
Dec. 28, Dec. 29, Dec. 30,
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities
- --------------------
Net income $ 49,221 $ 42,794 $ 45,194
Adjustments to reconcile net income
to net cash used by
operating activities:
Equity in undistributed earnings of
Landstar System Holdings, Inc. (49,309) (42,838) (45,296)
---------- ---------- ----------
Net Cash Used By Operating
Activities (88) (44) (102)
---------- ---------- ----------
Investing Activities
- --------------------
Additional investments in and advances
from Landstar System Holdings,
Inc., net 19,060 34,082 46,144
---------- ---------- ----------
Net Cash Provided By Investing
Activities 19,060 34,082 46,144
---------- ---------- ----------
Financing Activities
- --------------------
Proceeds from repayment of notes
receivable arising from exercises
of stock options 4,867 1,397 51
Proceeds from exercises of
stock options 2,467 1,764 92
Purchases of common stock (26,306) (37,199) (46,185)
---------- ---------- ----------
Net Cash Used By Financing
Activities (18,972) (34,038) (46,042)
---------- ---------- ----------
Change in cash 0 0 0
Cash at beginning of period 0 0 0
---------- ---------- ----------
Cash at end of period $ 0 $ 0 $ 0
========== ========== ==========
</TABLE>
S-3
29
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Balance Additions
at --------------------------
Beginning Charged to Charged to Balance
of Costs and Other Accounts Deductions at End
Description Period Expenses Describe Describe (A) of Period
- ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 4,416 $ 3,936 $ - $ (4,399) $ 3,953
Deducted from other
receivables 4,740 3,576 - (2,985) 5,331
Deducted from other non-
current receivables 228 2 - 230
------- --------- ----------- -------- -------
$ 9,384 $ 7,514 $ - $ (7,384) $ 9,514
======= ========= =========== ======== =======
</TABLE>
(A) Write-offs, net of recoveries.
S-4
30
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Balance Additions
at --------------------------
Beginning Charged to Charged to Balance
of Costs and Other Accounts Deductions at End
Description Period Expenses Describe Describe(A) of Period
- ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 4,450 $ 4,384 $ - $ (4,418) $ 4,416
Deducted from other
receivables 5,089 3,958 - (4,307) 4,740
Deducted from other
non-current
receivables 1,816 (189) - (1,399) 228
------- --------- --------- -------- -------
$11,355 $ 8,153 $ - $(10,124) $ 9,384
======= ========= ========= ======== =======
</TABLE>
(A) Write-offs, net of recoveries.
S-5
31
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ------ ------ ------
Balance Additions
at --------------------------
Beginning Charged to Charged to Balance
of Costs and Other Accounts Deductions at End
Description Period Expenses Describe Describe(A) of Period
- ----------- --------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Deducted from trade
receivables $ 4,002 $ 1,915 $ - $ (1,467) $ 4,450
Deducted from other
receivables 5,033 2,479 - (2,423) 5,089
Deducted from other non-
current receivables 1,626 198 - (8) 1,816
------- --------- --------- -------- -------
$10,661 $ 4,592 $ - $ (3,898) $11,355
======= ========= ========= ======== =======
</TABLE>
(A) Write-offs, net of recoveries.
S-6
32
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>ex10-6.txt
<DESCRIPTION>AMENDMENT TO KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.6
AMENDMENT TO
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
This amendment (this "Amendment") to the Key Executive Employment Protection
Agreement (the "Agreement") between Landstar System, Inc., a Delaware
corporation (the "Company"), and Jeffrey C. Crowe (the "Executive"), dated
January 30, 1998, is entered into as of August 7, 2002.
WHEREAS, the parties to the Agreement desire to amend the Agreement in certain
respects.
NOW THEREFORE, the Agreement is hereby amended as follows:
1. Section 2(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 2(a)(ii) shall be added to read as follows:
(ii) the Shareholders of the Company approve a definitive agreement (a
"Definitive Agreement") (a) for the merger or other business combination of
the Company with or into another corporation, a majority of the directors of
which were not directors of the Company immediately prior to the merger and in
which the shareholders of the Company immediately prior to the effective date
of such merger directly or indirectly own less than 50% of the voting power in
such corporation or (b) for the sale or other disposition of all or
substantially all of the assets of the Company, and the transactions
contemplated by such Definitive Agreement are, in either case, consummated;
2. The first sentence of Section 3(a) of the Agreement is hereby deleted in
its entirety and a new first sentence of such Section 3(a) shall be added to
read as follows:
If (x) on or before the second anniversary of the Change in Control Date (i)
the Company terminates the Executive's employment for any reason other than
for Cause or Disability or (ii) the Executive voluntarily terminates his
employment for Good Reason or (y) the Executive voluntarily terminates his
employment for any reason at any time within the 60-day period beginning on
the 181st day following the Change in Control Date or (z) if the Executive's
employment is terminated by the Company for any reason other than death,
Disability or Cause or by the Executive for Good Reason, after the execution
of a Definitive Agreement but prior to the consummation thereof and the
transaction contemplated by such Definitive Agreement are consummated, then
the Company shall pay to the Executive the following amounts:
3. Section 3(a)(ii)(B) of the Agreement is hereby deleted in its entirety and a
new Section 3(a)(ii)(B) shall be added, to read as follows:
(B) the amount that would have been payable to the Executive as a bonus for the
year in which the Change of Control occurs, determined by multiplying the
Executive's annual Base Salary by his Participant's Percentage Participation
("PPP") established for such year under the Company's Executive Incentive
Compensation Plan (or any successor plan thereto); and
4. Except as set forth above, the Agreement shall remain in full force and
effect in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the 7th day of August, 2002.
LANDSTAR SYSTEM, INC.
By: _____________________
Henry H. Gerkens,
President & Chief
Operating Officer
Agreed and Accepted:
________________________
Jeffrey C. Crowe
________________________
Date
33
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>ex10-7.txt
<DESCRIPTION>AMENDMENT TO KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.7
AMENDMENT TO
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
This amendment (this "Amendment") to the Key Executive Employment Protection
Agreement (the "Agreement") between Landstar System, Inc., a Delaware
corporation (the "Company"), and Henry H. Gerkens (the "Executive"), dated
January 30, 1998, is entered into as of August 7, 2002.
WHEREAS, the parties to the Agreement desire to amend the Agreement in certain
respects.
NOW THEREFORE, the Agreement is hereby amended as follows:
1. Section 2(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 2(a)(ii) shall be added to read as follows:
(ii) the Shareholders of the Company approve a definitive agreement (a
"Definitive Agreement") (a) for the merger or other business combination of
the Company with or into another corporation, a majority of the directors of
which were not directors of the Company immediately prior to the merger and in
which the shareholders of the Company immediately prior to the effective date
of such merger directly or indirectly own less than 50% of the voting power in
such corporation or (b) for the sale or other disposition of all or
substantially all of the assets of the Company, and the transactions
contemplated by such Definitive Agreement are, in either case, consummated;
2. The first sentence of Section 3(a) of the Agreement is hereby deleted in its
entirety and a new first sentence of such Section 3(a) shall be added to read
as follows:
If (x) on or before the second anniversary of the Change in Control Date (i)
the Company terminates the Executive's employment for any reason other than for
Cause or Disability or (ii) the Executive voluntarily terminates his employment
for Good Reason or (y) the Executive voluntarily terminates his employment for
any reason at any time within the 60-day period beginning on the 181st day
following the Change in Control Date or (z) if the Executive's employment is
terminated by the Company for any reason other than death, Disability or Cause
or by the Executive for Good Reason, after the execution of a Definitive
Agreement but prior to the consummation thereof and the transaction
contemplated by such Definitive Agreement are consummated, then the Company
shall pay to the Executive the following amounts:
3. Section 3(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 3(a)(ii) shall be added, to read as follows:
(ii) a cash amount (the "Severance Amount") equal to three times the sum of
(A) the Executive's annual Base Salary; and
(B) the amount that would have been payable to the Executive as a bonus for the
year in which the Change of Control occurs, determined by multiplying the
Executive's annual Base Salary by his Participant's Percentage Participation
("PPP") established for such year under the Company's Executive Incentive
Compensation Plan (or any successor plan thereto); and
4. Except as set forth above, the Agreement shall remain in full force and
effect in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the 7th day of August, 2002.
LANDSTAR SYSTEM, INC.
By: _____________________
Jeffrey C. Crowe,
Chairman of the Board
& Chief Executive Officer
Agreed and Accepted:
________________________
Henry H. Gerkens
________________________
Date
34
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>ex10-8.txt
<DESCRIPTION>AMENDMENT TO KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.8
AMENDMENT TO
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
This amendment (this "Amendment") to the Key Executive Employment Protection
Agreement (the "Agreement") between Landstar System, Inc., a Delaware
corporation (the "Company"), and Robert C. LaRose (the "Executive"), dated
January 30, 1998, is entered into as of August 7, 2002.
WHEREAS, the parties to the Agreement desire to amend the Agreement in certain
respects.
NOW THEREFORE, the Agreement is hereby amended as follows:
1. Section 2(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 2(a)(ii) shall be added to read as follows:
(ii) the Shareholders of the Company approve a definitive agreement (a
"Definitive Agreement") (a) for the merger or other business combination of
the Company with or into another corporation, a majority of the directors of
which were not directors of the Company immediately prior to the merger and in
which the shareholders of the Company immediately prior to the effective date
of such merger directly or indirectly own less than 50% of the voting power in
such corporation or (b) for the sale or other disposition of all or
substantially all of the assets of the Company, and the transactions
contemplated by such Definitive Agreement are, in either case, consummated;
2. The first sentence of Section 3(a) of the Agreement is hereby deleted in
its entirety and a new first sentence of such Section 3(a) shall be added to
read as follows:
If (x) on or before the second anniversary of the Change in Control Date (i)
the Company terminates the Executive's employment for any reason other than
for Cause or Disability or (ii) the Executive voluntarily terminates his
employment for Good Reason or (y) the Executive voluntarily terminates his
employment for any reason at any time within the 60-day period beginning on
the 181st day following the Change in Control Date or (z) if the Executive's
employment is terminated by the Company for any reason other than death,
Disability or Cause or by the Executive for Good Reason, after the execution
of a Definitive Agreement but prior to the consummation thereof and the
transaction contemplated by such Definitive Agreement are consummated, then
the Company shall pay to the Executive the following amounts:
3. Section 3(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 3(a)(ii) shall be added, to read as follows:
(ii) a cash amount (the "Severance Amount") equal to two times the sum of
(A) the Executive's annual Base Salary; and
(B) the amount that would have been payable to the Executive as a bonus
for the year in which the Change of Control occurs, determined by multiplying
the Executive's annual Base Salary by his Participant's Percentage
Participation ("PPP") established for such year under the Company's Executive
Incentive Compensation Plan (or any successor plan thereto); and
4. Except as set forth above, the Agreement shall remain in full force and
effect in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the 7th day of August, 2002.
LANDSTAR SYSTEM, INC.
By: _____________________
Jeffrey C. Crowe,
Chairman of the Board
& Chief Executive Officer
Agreed and Accepted:
________________________
Robert C. LaRose
________________________
Date
35
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>ex10-9.txt
<DESCRIPTION>AMENDMENT TO KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.9
AMENDMENT TO
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
This amendment (this "Amendment") to the Key Executive Employment Protection
Agreement (the "Agreement") between Landstar System, Inc., a Delaware
corporation (the "Company"), and Gary W. Hartter (the "Executive"), dated
January 30, 1998, is entered into as of August 7, 2002.
WHEREAS, the parties to the Agreement desire to amend the Agreement in certain
respects.
NOW THEREFORE, the Agreement is hereby amended as follows:
1. Section 2(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 2(a)(ii) shall be added to read as follows:
(ii) the Shareholders of the Company approve a definitive agreement (a
"Definitive Agreement") (a) for the merger or other business combination of
the Company with or into another corporation, a majority of the directors of
which were not directors of the Company immediately prior to the merger and in
which the shareholders of the Company immediately prior to the effective date
of such merger directly or indirectly own less than 50% of the voting power in
such corporation or (b) for the sale or other disposition of all or
substantially all of the assets of the Company, and the transactions
contemplated by such Definitive Agreement are, in either case, consummated;
2. The first sentence of Section 3(a) of the Agreement is hereby deleted in
its entirety and a new first sentence of such Section 3(a) shall be added to
read as follows:
If (x) on or before the second anniversary of the Change in Control Date (i)
the Company terminates the Executive's employment for any reason other than for
Cause or Disability or (ii) the Executive voluntarily terminates his employment
for Good Reason or (y) the Executive voluntarily terminates his employment for
any reason at any time within the 60-day period beginning on the 181st day
following the Change in Control Date or (z) if the Executive's employment is
terminated by the Company for any reason other than death, Disability or Cause
or by the Executive for Good Reason, after the execution of a Definitive
Agreement but prior to the consummation thereof and the transaction
contemplated by such Definitive Agreement are consummated, then the Company
shall pay to the Executive the following amounts:
3. Section 3(a)(ii)(B) of the Agreement is hereby deleted in its entirety and
a new Section 3(a)(ii)(B) shall be added, to read as follows:
(B) the amount that would have been payable to the Executive as a bonus for
the year in which the Change of Control occurs, determined by multiplying the
Executive's annual Base Salary by his Participant's Percentage Participation
("PPP") established for such year under the Company's Executive Incentive
Compensation Plan (or any successor plan thereto); and
4. Except as set forth above, the Agreement shall remain in full force and
effect in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the 7th day of August, 2002.
LANDSTAR SYSTEM, INC.
By: _____________________
Jeffrey C. Crowe,
Chairman of the Board
& Chief Executive Officer
Agreed and Accepted:
________________________
Gary W. Hartter
________________________
Date
36
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>ex10-10.txt
<DESCRIPTION>AMENDMENT TO KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.10
AMENDMENT TO
KEY EXECUTIVE EMPLOYMENT PROTECTION AGREEMENT
This amendment (this "Amendment") to the Key Executive Employment Protection
Agreement (the "Agreement") between Landstar System, Inc., a Delaware
corporation (the "Company"), and James R. Hertwig (the "Executive"), dated
January 30, 1998, is entered into as of August 7, 2002.
WHEREAS, the parties to the Agreement desire to amend the Agreement in certain
respects.
NOW THEREFORE, the Agreement is hereby amended as follows:
1. Section 2(a)(ii) of the Agreement is hereby deleted in its entirety and a
new Section 2(a)(ii) shall be added to read as follows:
(ii) the Shareholders of the Company approve a definitive agreement (a
"Definitive Agreement") (a) for the merger or other business combination of
the Company with or into another corporation, a majority of the directors of
which were not directors of the Company immediately prior to the merger and in
which the shareholders of the Company immediately prior to the effective date
of such merger directly or indirectly own less than 50% of the voting power in
such corporation or (b) for the sale or other disposition of all or
substantially all of the assets of the Company, and the transactions
contemplated by such Definitive Agreement are, in either case, consummated;
2. The first sentence of Section 3(a) of the Agreement is hereby deleted in its
entirety and a new first sentence of such Section 3(a) shall be added to read
as follows:
If (x) on or before the second anniversary of the Change in Control Date (i)
the Company terminates the Executive's employment for any reason other than for
Cause or Disability or (ii) the Executive voluntarily terminates his employment
for Good Reason or (y) the Executive voluntarily terminates his employment for
any reason at any time within the 60-day period beginning on the 181st day
following the Change in Control Date or (z) if the Executive's employment is
terminated by the Company for any reason other than death, Disability or Cause
or by the Executive for Good Reason, after the execution of a Definitive
Agreement but prior to the consummation thereof and the transaction
contemplated by such Definitive Agreement are consummated, then the Company
shall pay to the Executive the following amounts:
3. Section 3(a)(ii)(B) of the Agreement is hereby deleted in its entirety and
a new Section 3(a)(ii)(B) shall be added, to read as follows:
(B) the amount that would have been payable to the Executive as a bonus for
the year in which the Change of Control occurs, determined by multiplying the
Executive's annual Base Salary by his Participant's Percentage Participation
("PPP") established for such year under the Company's Executive Incentive
Compensation Plan (or any successor plan thereto); and
4. Except as set forth above, the Agreement shall remain in full force and
effect in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the 7th day of August, 2002.
LANDSTAR SYSTEM, INC.
By: _____________________
Jeffrey C. Crowe,
Chairman of the Board
& Chief Executive Officer
Agreed and Accepted:
________________________
James R. Hertwig
________________________
Date
37
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>ex10-17.txt
<DESCRIPTION>LETTER AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.17
July 2, 2002
Mr. Henry Gerkens
Landstar System, Inc.
13410 Sutton Park Drive, South
Jacksonville, Florida 32224
Dear Henry:
I refer to our discussions recently concerning the treatment of your
options under the Landstar Stock Option Plans (the "Option Plans") and your
bonus under the Landstar Executive Incentive Compensation Plan (the "Bonus
Plan") in the event your employment with the Company is terminated in
connection with any Change of Control (as such term is defined in the Option
Plans) of the Company.
This letter is to advise you that the Compensation Committee of the Board
of Directors of the Company (the "Compensation Committee") has exercised its
discretionary authority under the Option Plans to determine that in the event
your employment with the Company is or is likely to be terminated for any
reason in connection with any Change of Control, each unexercised option
granted to you prior to such Change of Control will be "cashed out" for an
amount equal to the excess of the Change of Control Price Change of Control
Price (as such term is defined in the Option Plans) over the exercise price of
each such option.
This letter is also to advise you that the Compensation Committee has
exercised its discretionary authority under the Bonus Plan to determine that
in the event your employment with the Company is or is likely to be terminated
for any reason in connection with any Change of Control occurring prior to the
end of any calendar year, you will receive a prorated bonus for such year based
on the bonus you would have received under the Bonus Plan if you had remained
an employee of the Company through the end of the year in which such Change of
Control occurs.
A copy of the resolutions of the Compensation Committee with respect to
the foregoing matters is attached for your records.
Very truly yours,
Jeffrey C. Crowe
38
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>9
<FILENAME>ex11-1.txt
<DESCRIPTION>CALCULATION OF EARNINGS PER COMMON SHARE
<TEXT>
<PAGE>
EXHIBIT 11.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Years Ended
December 28, December 29, December 30,
2002 2001 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 49,221 $ 42,794 $ 45,194
============ ============ ============
Average number of common shares
outstanding (1) 16,141 16,672 17,562
============ ============ ============
Earnings per common share (1) $ 3.05 $ 2.57 $ 2.57
============ ============ ============
(1) All earnings per share amounts and average number of shares outstanding have
been restated to give retroactive effect to a two-for-one stock split
effected in the form of a 100% stock dividend declared July 17, 2002.
</TABLE>
39
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>10
<FILENAME>ex11-2.txt
<DESCRIPTION>CALCULATION OF DILUTED EARNINGS PER SHARE
<TEXT>
<PAGE>
EXHIBIT 11.2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Years Ended
December 28, December 29, December 30,
2002 2001 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 49,221 $ 42,794 $ 45,194
============ ============ ============
Average number of common shares
outstanding (1) 16,141 16,672 17,562
Plus: Incremental shares from
assumed exercise of stock
options (1) 626 420 400
------------ ------------ ------------
Average number of common shares
and incremental shares
outstanding (1) 16,767 17,092 17,962
============ ============ ============
Diluted earnings per share (1) $ 2.94 $ 2.50 $ 2.52
============ ============ ============
</TABLE>
(1) All earnings per share amounts and average number of shares outstanding
have been restated to give retroactive effect to a two-for-one stock split
effected in the form of a 100% stock dividend declared July 17, 2002.
40
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>11
<FILENAME>ex13-1.txt
<DESCRIPTION>MD&A AND FINANCIAL STATEMENTS
<TEXT>
<PAGE>
EXHIBIT 13.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries. The Company has three reportable business segments. These are
the carrier, multimodal and insurance segments.
The carrier segment consists of Landstar Ranger, Inc., Landstar Inway, Inc.,
Landstar Ligon, Inc. and Landstar Gemini, Inc. The carrier segment primarily
provides truckload transportation for a wide range of general commodities
over irregular routes with its fleet of dry and specialty vans and unsided
trailers, including flatbed, drop deck and specialty. It also provides
short-to-long haul movement of containers by truck, dedicated power-only
truck capacity and truck brokerage. The carrier segment markets its services
primarily through independent commission sales agents and utilizes independent
contractors who provide truck capacity to the Company under exclusive lease
arrangements (the "Independent Contractors") and other third party truck
capacity providers. Historically, the Company's carrier segment has primarily
relied on capacity provided by Independent Contractors. Pursuant to a plan to
augment its available capacity and increase its revenue, the Company has begun
to increase the carrier segment's use of capacity provided by other third party
truck capacity providers. A significant decrease in available capacity provided
by either the Company's Independent Contractors or other third party capacity
providers could have a material adverse effect on Landstar, including its
results of operations and revenue. The nature of the carrier segment's business
is such that a significant portion of its operating costs varies directly with
revenue. The carrier segment typically contributes approximately 78% of
Landstar's consolidated revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar
Express America, Inc. Transportation services provided by the multimodal
segment include the arrangement of intermodal moves, contract logistics, truck
brokerage and emergency and expedited ground and air freight. The multimodal
segment markets its services through independent commission sales agents and
utilizes capacity provided by Independent Contractors and other third party
capacity providers, including truck brokerage carriers, railroads and air
cargo carriers. The nature of the multimodal segment's business is such that a
significant portion of its operating costs also varies directly with revenue.
The multimodal segment typically contributes approximately 20% of Landstar's
consolidated revenue.
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary, and Risk
Management Claim Services, Inc. The insurance segment provides risk and
claims management services to Landstar's operating subsidiaries. In addition,
it reinsures certain property, casualty and occupational accident risks of
certain Independent Contractors who have contracted to haul freight for
Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries. The insurance segment typically contributes
approximately 2% of Landstar's consolidated revenue.
41
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Purchased transportation represents the amount an Independent Contractor or
other third party capacity provider is paid to haul freight. The amount of
purchased transportation paid to an Independent Contractor is primarily based
on a contractually agreed-upon percentage of revenue generated by the haul.
Purchased transportation for the brokerage services operations of the
carrier and multimodal segments is based on a negotiated rate for each load
hauled. Purchased transportation for the intermodal services operations
and the air freight operations of the multimodal segment is based on a
contractually agreed-upon fixed rate. Purchased transportation as a
percentage of revenue for brokerage services and rail intermodal operations
is normally higher than that of Landstar's other transportation operations.
Purchased transportation is the largest component of costs and expenses and,
on a consolidated basis, increases or decreases in proportion to the revenue
generated through Independent Contractors and other third party capacity
providers. Commissions to agents are primarily based on contractually
agreed-upon percentages of revenue at the carrier segment and of gross profit,
defined as revenue less the cost of purchased transportation, at the
multimodal segment. Commissions to agents as a percentage of consolidated
revenue will vary directly with the percentage of consolidated revenue
generated by the carrier segment, the multimodal segment and Signature and
with changes in gross profit at the multimodal segment.
Trailing equipment rent and maintenance costs are the largest components
of other operating costs.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. Landstar retains liability
for individual commercial trucking claims up to $5,000,000 per occurrence.
For commercial trucking claims incurred prior to May 1, 2001, Landstar
retains liability up to $1,000,000 per occurrence. To reduce its
exposure to unladen liability claims (claims incurred while a vehicle
is being operated without a trailer attached or is being operated with an
attached trailer which does not contain or carry any cargo), Landstar
requires its Independent Contractors to maintain unladen truckers liability
coverage of $1,000,000 per occurrence. Under the Company's unladen truckers
liability program, Independent Contractors purchase unladen truckers liability
coverage from a third party insurance company. Signature then reinsures unladen
liability coverage for Independent Contractors who participate in the
Company's unladen program up to $1,000,000 per occurrence. For unladen claims
incurred prior to January 1, 2002, Landstar retains liability up to $25,000
per occurrence. The Company also retains liability for each general liability
claim up to $1,000,000, $250,000 for each workers' compensation claim and
$250,000 for each cargo claim. The Company's exposure to liability associated
with accidents incurred by other third party capacity providers who haul
freight on behalf of the Company is reduced by various factors including the
extent to which they maintain their own insurance coverage. A material
increase in the frequency or severity of accidents, cargo or workers'
compensation claims or the unfavorable development of existing claims could be
expected to materially adversely affect Landstar's results of operations.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are communications costs and rent
expense.
Depreciation and amortization primarily relates to depreciation of trailing
equipment and management information services equipment.
On July 17, 2002, Landstar declared a two-for-one stock split of its common
stock to be effected in the form of a 100% stock dividend. Stockholders of
record on August 2, 2002 received one additional share of common stock for
each share held. The additional shares were distributed on August 12, 2002.
All share and per share amounts have been restated to give retroactive
effect to this stock split.
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The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years
------------------------
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Investment income 0.1 0.3 0.3
Costs and expenses:
Purchased transportation 74.1 74.0 73.8
Commissions to agents 7.9 7.9 8.0
Other operating costs 2.3 2.3 2.1
Insurance and claims 2.8 2.4 2.2
Selling, general and administrative 6.7 7.2 7.1
Depreciation and amortization 0.7 1.0 0.9
Non-recurring costs 0.4
------ ------ ------
Total costs and expenses 94.5 94.8 94.5
------ ------ ------
Operating income 5.6 5.5 5.8
Interest and debt expense 0.3 0.5 0.6
------ ------ ------
Income before income taxes 5.3 5.0 5.2
Income taxes 2.0 1.9 2.0
------ ------ ------
Net income 3.3% 3.1% 3.2%
====== ====== ======
</TABLE>
FISCAL YEAR ENDED DECEMBER 28, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
2001
Revenue for the fiscal year 2002 was $1,506,555,000, an increase of
$113,784,000, or 8.2%, compared to revenue for the 2001 fiscal year.
Revenue increased $79,995,000, $29,867,000 and $3,922,000 at the carrier,
multimodal and insurance segments, respectively. Overall, revenue miles
(volume) increased approximately 11%. Revenue per load increased approximately
5% while revenue per revenue mile (price) decreased approximately 3%,
reflecting changes in freight mix, including an 8% increase in the average
length of haul at the carrier segment. Revenue at the insurance segment
increased primarily due to an increase in the level of reinsurance underwritten
for unladen truckers liability for certain of the Company's Independent
Contractors from $25,000 per occurrence to $1,000,000 per occurrence effective
January 1, 2002.
Investment income at the insurance segment was $1,950,000 and $3,567,000
for fiscal year 2002 and 2001, respectively. The decrease in investment income
was primarily due to a reduced rate of return, attributable to the decline in
interest rates, on investments held by the insurance segment.
Purchased transportation was 74.1% of revenue in 2002 compared with 74.0% in
2001. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased brokerage revenue at the carrier segment
and increased rail intermodal revenue at the multimodal segment. Commissions
to agents were 7.9% of revenue in both 2002 and 2001, as increased agent
commissions at the multimodal segment were offset by reduced agent commissions
on brokerage revenue at the carrier segment and increased premium revenue at
the insurance segment.
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Other operating costs were 2.3% of revenue in both 2002 and 2001, as increased
trailer maintenance costs were offset by reductions in Independent Contractor
recruiting, qualification and incentive costs and reduced net costs of plates
and permits. Insurance and claims were 2.8% of revenue in 2002 compared with
2.4% in 2001. The increase in insurance and claims as a percentage of revenue
was primarily due to increased commercial trucking claims in the $4 million
excess of $1 million layer and increased unladen truckers liability claims due
to the increased level of risk assumed by Signature under the Company's unladen
truckers liability program effective January 1, 2002. These increases were
partially offset by a reduction in insurance claims resulting from increased
revenue hauled by other third party capacity providers. Selling, general and
administrative costs were 6.7% of revenue in 2002 and 7.2% in 2001. The
decrease in selling, general and administrative costs as a percentage of
revenue was primarily due to decreased wages, travel and entertainment expenses
and communication costs, as a result of implementation of certain cost
reduction initiatives, and a decreased provision for customer bad debt,
partially offset by an increased provision for bonuses under the Company's
incentive compensation plans, increased costs for the Company's employee
benefit programs and increased legal fees. Depreciation and amortization was
0.7% of revenue in 2002 and 1.0% of revenue in 2001. The decrease in
depreciation and amortization as a percentage of revenue was primarily due to
the January 1, 2002 implementation of Statement of Financial Accounting
Standards ("SFAS") No. 142, which eliminated the amortization of goodwill, and
reduced depreciation expense for company-owned trailing equipment and
information technology assets.
Interest and debt expense was 0.3% of revenue in 2002 and 0.5% of revenue in
2001. This decrease was primarily attributable to lower interest rates, reduced
average borrowings on the Company's senior credit facility and decreased
average capital lease obligations for trailing equipment.
The provisions for income taxes for the 2002 and 2001 fiscal years were based
on effective income tax rates of 38.0% and 38.5%, respectively, which are
higher than the statutory federal income tax rate primarily as a result of
state income taxes and the meals and entertainment exclusion in both years
and amortization of certain goodwill in 2001. At December 28, 2002, the
valuation allowance of $491,000 was attributable to deferred state income
tax benefits, which primarily represented state operating loss carryforwards
at one subsidiary. The valuation allowance and goodwill will be reduced by
$463,000 when realization of deferred state income tax benefits becomes likely.
The Company believes that deferred income tax benefits, net of the valuation
allowance, are more likely than not to be realized because of the Company's
ability to generate future taxable earnings. The decrease in the effective
income tax rate was primarily attributable to the elimination of goodwill
amortization in 2002.
Net income was $49,221,000, or $3.05 per common share ($2.94 per diluted
share), in 2002 compared with $42,794,000, or $2.57 per common share ($2.50
per diluted share), in 2001.
FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
2000
Revenue for the fiscal year 2001 was $1,392,771,000, a decrease of $25,721,000,
or 1.8%, compared to revenue for the 2000 fiscal year. Revenue decreased
$18,774,000, $6,238,000 and $709,000 at the carrier, multimodal and insurance
segments, respectively. The decrease was primarily attributable to the extra
week in the 53-week fiscal year 2000 compared to the 52-week fiscal year 2001.
As a result, revenue miles decreased approximately 3% compared to fiscal year
2000, which was partially offset by an increase in revenue per revenue mile of
approximately 1%, which reflected improved freight quality primarily at the
multimodal segment.
44
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Investment income at the insurance segment was $3,567,000 and $4,317,000
for fiscal year 2001 and 2000, respectively. The decrease in investment income
was primarily due to a reduced rate of return, attributable to the decline in
interest rates, on investments held by the insurance segment.
Purchased transportation was 74.0% of revenue in 2001 compared with 73.8% in
2000. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased rates charged by other third party capacity
providers at the multimodal segment as a result of higher fuel costs,
increased brokerage revenue at the carrier segment and decreased premium
revenue at the insurance segment.
Commissions to agents were 7.9% of revenue in 2001 and 8.0% of revenue in 2000.
The decrease in commissions to agents as a percentage of revenue was
primarily due to the increased purchased transportation costs incurred at
the multimodal segment which negatively impacted gross profit, and resulted
in lower agent commissions. Other operating costs were 2.3% of revenue in 2001
compared with 2.1% in 2000. The increase in other operating costs as a
percentage of revenue was primarily due to higher net trailer costs, an
increased provision for contractor bad debts and increased Independent
Contractor recruiting and qualification costs. Insurance and claims were 2.4%
of revenue in 2001 compared with 2.2% in 2000 primarily due to greater
favorable development of prior year claims in 2000 than realized in 2001,
partially offset by reduced premiums for commercial trucking liability
insurance and increased brokerage revenue as a percentage of total revenue,
which has a lower claims risk profile. The reduction in premiums for
commercial trucking liability insurance was attributable to the increase
in the level of self-insured retention from $1,000,000 to $5,000,000 per
occurrence effective May 1, 2001. Selling, general and administrative
costs were 7.2% of revenue in 2001 and 7.1% in 2000. The increase in
selling, general and administrative costs as a percentage of revenue was
primarily due to an increased provision for customer bad debts
and increased wages and benefits, partially offset by a decrease in the
provision for bonuses under the Company's management incentive compensation
plan. Depreciation and amortization was 1.0% of revenue in 2001 and 0.9% of
revenue in 2000. The increase in depreciation and amortization as a percentage
of revenue was due to an increase in company-owned trailing equipment.
Interest and debt expense was 0.5% of revenue in 2001 and 0.6% of revenue in
2000. This decrease was primarily attributable to lower interest rates.
At December 25, 1999, approximately 100 Landstar Ranger, Inc. ("Landstar
Ranger") drivers were represented by the International Brotherhood of Teamsters
(the "Teamsters"). The vast majority of these unionized drivers participated
in the Teamsters' Central States Southeast and Southwest Areas Pension Fund
(the "Fund"). As a result of the terms of a new collective bargaining
agreement, the Trustees of the Fund terminated participation in the Fund by
Landstar Ranger effective October 1, 2000. The Trustees of the Fund regarded
this action as a withdrawal by Landstar Ranger. Landstar Ranger recorded a
charge in the third quarter of 2000 in the amount of $2,230,000 for the cost
of withdrawal from the Fund. At December 28, 2002, 43 Landstar Ranger drivers
were represented by the Teamsters and neither Landstar nor any of its
subsidiaries participates in any multi-employer pension plans.
45
<PAGE>
On March 28, 2000, the Company announced a plan to restructure the operations
of Landstar Ligon, Inc. and to relocate its headquarters from Madisonville,
Kentucky to Jacksonville, Florida in June of 2000. As a result of the
restructuring and relocation, a one-time charge in the amount of $3,040,000 was
recorded during the second quarter of 2000 representing approximately
$1,370,000 of employee and office relocation costs, $1,000,000 of severance
costs and $670,000 of other costs. The restructuring and relocation were
substantially completed by September 23, 2000.
The provisions for income taxes for the 2001 and 2000 fiscal years were based
on an effective income tax rate of 38.5%, which is
higher than the statutory federal income tax rate primarily as a result of
state income taxes, amortization of certain goodwill and the meals and
entertainment exclusion.
Net income was $42,794,000, or $2.57 per common share ($2.50 per diluted
share), in 2001 compared with $45,194,000, or $2.57 per common share ($2.52
per diluted share), in 2000. After deducting related income tax benefits of
$2,105,000, the non-recurring costs reduced net income by $3,165,000 in 2000.
Excluding non-recurring costs, net income would have been $48,359,000, or
$2.75 per common share ($2.69 per diluted share), in 2000.
CAPITAL RESOURCES AND LIQUIDITY
On December 20, 2001, Landstar renegotiated its existing credit agreement with
a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the
"Third Amended and Restated Credit Agreement"). The Third Amended and
Restated Credit Agreement provides $175,000,000 of borrowing capacity in the
form of a revolving credit facility, $50,000,000 of which may be utilized in
the form of letter of credit guarantees. At December 28, 2002, Landstar had
commitments for letters of credit outstanding in the amount of $18,060,000,
primarily as collateral for estimated insurance claims, $9,080,000 of which
were supported by the Third Amended and Restated Credit Agreement and
$8,980,000 secured by assets deposited with a financial institution. The
Third Amended and Restated Credit Agreement expires on January 5, 2005.
Borrowings under the Third Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by JPMorgan Chase
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to JPMorgan Chase Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Third Amended and Restated Credit Agreement. The margin is
subject to an increase of .125% if the aggregate amount outstanding under the
Third Amended and Restated Credit Agreement exceeds 50% of the total
borrowing capacity. As of December 28, 2002, the margin was equal to 87.5/100
of 1%.
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The unused portion of the Third Amended and Restated Credit Agreement carries a
commitment fee determined based on the level of the Leverage Ratio, as therein
defined. As of December 28, 2002, the commitment fee for the unused portion of
the Third Amended and Restated Credit Agreement was 0.250%. At December 28,
2002, the weighted average interest rate on borrowings outstanding under the
Third Amended and Restated Credit Agreement was 2.27%.
The Third Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Third Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Third Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Interest
Coverage, earnings before interest and taxes exceeded the required minimum by
approximately $64,000,000 for the fiscal year ended December 28, 2002.
The Third Amended and Restated Credit Agreement provides for an event of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Third Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of Landstar System Holdings,
Inc.'s ("LSHI") subsidiaries guarantee LSHI's obligations under the Third
Amended and Restated Credit Agreement.
Shareholders' equity was $149,093,000, or 66% of total capitalization,
at December 28, 2002, compared with $117,440,000, or 54% of total
capitalization, at December 29, 2001. The increase in shareholders' equity
was a result of current year net income, repayment of notes receivable
arising from exercises of stock options and exercises of stock options,
partially offset by the purchase of 554,879 shares of the Company's
common stock at a total cost of $26,306,000. As of December 28, 2002, the
Company may purchase an additional 445,121 shares of its common stock under its
authorized stock purchase program. Long-term debt including current maturities
was $77,360,000 at December 28, 2002, $24,514,000 lower than at December 29,
2001. Working capital and the ratio of current assets to current liabilities
were $120,630,000 and 1.78 to 1, respectively, at December 28, 2002, compared
with $121,808,000 and 1.92 to 1, respectively, at December 29, 2001. Landstar
has historically operated with current ratios within the range of 1.5 to
1 to 2.0 to 1. Cash provided by operating activities was $84,313,000
in 2002 compared with $49,794,000 in 2001. The increase in cash provided by
operating activities was primarily attributable to increased earnings and
timing of payments. During the 2002 fiscal year, Landstar purchased $4,421,000
of operating property and acquired $16,370,000 of revenue equipment by
entering into capital leases. Landstar anticipates it will acquire between
$18,000,000 to $30,000,000 of operating property during fiscal year 2003 either
by purchase or by lease financing.
At December 28, 2002, the Company's obligations and commitments to make future
payments under contracts, such as debt and lease agreements, were as follows
(in thousands):
Payments Due By Period
Contractual Less than 1-3 4-5 After 5
Obligation Total 1 Year Years Years Years
Long-term debt $44,000 $44,000
Capital lease
obligations 36,285 $13,631 19,511 $3,143
Operating
leases 25,724 2,784 6,546 2,087 $14,307
-------- ------- ------- ------ -------
$106,009 $16,415 $70,057 $5,230 $14,307
======== ======= ======= ====== =======
Capital lease obligations above include $2,925,000 of imputed interest.
Operating leases include $22,488,000 related to the Company's main office
facility located in Jacksonville, Florida.
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Management believes that cash flow from operations combined with its borrowing
capacity under the Third Amended and Restated Credit Agreement will be
adequate to meet Landstar's debt service requirements, fund continued growth,
both internal and through acquisitions, complete any purchases under its
announced stock purchase program and meet working capital needs.
Management does not believe inflation has had a material impact on the results
of operations or financial condition of Landstar in the past five years.
However, inflation higher than that experienced in the past five years might
have an adverse effect on the Company's results of operations.
The Company and Ford Motor Co., Inc. are defendants in a suit alleging breach
of contract, misrepresentation and certain other causes of action arising out
of a contract between Landstar Logistics, Inc. and the plaintiff involving a
trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the
plaintiff, Gulf Bridge RoRo, Inc. The suit makes claim for $25,000,000
damages for breach of contract and $50,000,000 punitive and other damages
related to the misrepresentation counts. The Company has filed motions
for summary judgment with the court seeking, in addition to a judgment in its
favor, to dismiss Landstar System, Inc. from the litigation, to limit the
amount of damages obtainable by the plaintiff, to preclude fraud and other
theories upon which plaintiff seeks to obtain damages, and to exclude certain
evidence concerning damages sought to be introduced at trial by plaintiff,
among other things. Subject to the outcome of these motions, which is
anticipated in March 2003, discovery has been substantially completed in this
matter, and the Company anticipates that the matter will be tried in April
2003. The Company believes it has meritorious defenses to this litigation and
intends to continue to defend it vigorously. The Company also believes that
if this litigation were determined adversely to it, the liability of the
Company, exclusive of any available insurance recoveries, would not be
reasonably likely to have a material adverse effect on the financial condition
of the Company but that it could have a material adverse effect on the results
of operations in a given quarter or year. The Company has notified its
third party insurance carrier that it believes that a portion of the claims
made in this lawsuit are covered under insurance provided by that carrier, and
the carrier has agreed to pay the fees and expenses and to participate in the
defense of this litigation, subject to a reservation of rights. The Company
also intends to pursue its rights with respect to this coverage vigorously.
No assurances can be given as to the outcome of this litigation or any related
matter, however.
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc.
("OOIDA") and six individual Independent Contractors filed a putative class
action suit in the U.S. Court in Jacksonville, Florida, against the Company.
The suit alleges that certain aspects of Landstar's motor carrier's leases
with owner operators violate the federal leasing regulations. OOIDA seeks
injunctive relief, damages and attorney's fees. On December 17, 2002, the
Company filed a Motion to Dismiss and a Motion to Stay and Compel Arbitration
with respect to all of the leases that contain arbitration clauses. Landstar
believes it has meritorious defenses to this litigation and intends to defend
it vigorously. Landstar also believes that it treats its Independent
Contractors fairly and in a manner which reflects the important role they play
in the Company's operations.
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The Company is involved in certain other claims and pending litigation arising
from the normal conduct of business. Based on knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all such other claims and pending litigation and that the ultimate outcome,
after provisions thereof, will not have a material adverse effect on the
financial condition of Landstar, but could have a material effect on the
results of operations in a given quarter or year.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The allowance for doubtful accounts for both trade and other receivables
represents management's estimate of the amount of outstanding receivables
that will not be collected. During 2002, the Company experienced its second
consecutive year with an abnormally high level of bad debt expense.
Management believes this resulted from the difficult economic environment
experienced by the Company's customers and Independent Contractors. Although
management believes the amount of the allowance for both trade and other
receivables at December 28, 2002 is appropriate, a prolonged period of low
or no economic growth may adversely affect the collection of these
receivables. Correspondingly, a more robust economic environment may result
in the realization of some portion of the estimated uncollectible receivables.
As described in the accounting policy footnote to the financial statements,
Landstar provides for the estimated costs of self-insured claims primarily
on an actuarial basis. The amount recorded for the estimated liability for
claims incurred is based upon the facts and circumstances known on the
balance sheet date. The ultimate resolution of these claims may be for an
amount greater or less than the amount estimated by management.
The Company utilizes certain income tax planning strategies to reduce its
overall cost of income taxes. Upon audit, it is possible that certain
strategies might be disallowed resulting in an increased liability for
income taxes. The Company has provided for its estimated exposure attributable
to income tax planning strategies. Management believes that the provision
for liabilities resulting from the implementation of income tax planning
strategies is appropriate.
Significant variances from management's estimates for the amount of
uncollectible receivables, for the ultimate resolution of claims or the
provision for liabilities for income tax planning strategies can be expected to
positively or negatively affect Landstar's earnings in a given quarter or year.
However, management believes that the ultimate resolution of these items, given
a range of reasonably likely outcomes, will not significantly affect the
long-term financial condition of Landstar or its ability to fund its continuing
operations.
49
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In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement, effective
for fiscal years beginning after June 15, 2002, requires an enterprise to
record the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with the
retirement of a tangible long-lived asset. The enterprise is also to record
a corresponding increase to the carrying amount of the long-lived asset.
Management believes that this Statement will not have a material effect on the
financial position or results of operations of the Company.
FORWARD-LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical facts are "forward-looking statements." This
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-K statement contain forward-
looking statements, such as statements which relate to Landstar's business
objectives, plans, strategies and expectations. Terms such as "anticipates,"
"believes," "estimates," "plans," "predicts," "may," "should," "will," the
negative thereof and similar expressions are intended to identify forward-
looking statements. Such statements are by nature subject to uncertainties and
risks, including but not limited to: an increase in the frequency or severity
of accidents or workers' compensation claims; unfavorable development of
existing accident claims; dependence on independent sales agents; dependence
on third party capacity providers; disruptions or failures in our computer
systems; a downturn in domestic economic growth or growth in the
transportation sector; substantial industry competition; and other operational,
financial or legal risks or uncertainties detailed in this and Landstar's other
SEC filings from time to time. These risks and uncertainties could cause actual
results or events to differ materially from historical results or those
anticipated. Investors should not place undue reliance on such forward-looking
statements, and the Company undertakes no obligation to publicly update or
revise any forward-looking statements.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March are typically
lower than the quarters ending June, September and December.
50
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION> December 28, December 29,
2002 2001
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 65,447 $ 47,886
Short-term investments 3,130 2,982
Trade accounts receivable, less allowance
of $3,953 and $4,416 190,052 185,206
Other receivables, including advances to independent
contractors, less allowance of $5,331
and $4,740 12,640 13,779
Prepaid expenses and other current assets 3,338 4,020
-------- --------
Total current assets 274,607 253,873
-------- --------
Operating property, less accumulated depreciation
and amortization of $52,841 and $44,455 76,774 68,532
Goodwill 31,134 31,134
Other assets 18,233 11,112
-------- --------
Total assets $400,748 $364,651
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 16,545 $ 13,018
Accounts payable 60,297 55,813
Current maturities of long-term debt 12,123 9,965
Insurance claims 24,419 21,602
Other current liabilities 40,593 31,667
-------- --------
Total current liabilities 153,977 132,065
-------- --------
Long-term debt, excluding current maturities 65,237 91,909
Insurance claims 25,276 21,585
Deferred income taxes 7,165 1,652
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 16,337,506 and
13,328,834 shares 163 133
Additional paid-in capital 2,609 75,036
Retained earnings 173,817 258,162
Cost of 554,879 and 5,241,841 shares of common
stock in treasury (26,306) (209,926)
Notes receivable arising from exercise of stock options (1,190) (5,965)
-------- --------
Total shareholders' equity 149,093 117,440
-------- --------
Total liabilities and shareholders' equity $400,748 $364,651
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
51
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION> Fiscal Years Ended
December 28, December 29, December 30,
2002 2001 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 1,506,555 $ 1,392,771 $ 1,418,492
Investment income 1,950 3,567 4,317
Costs and expenses:
Purchased transportation 1,116,009 1,030,454 1,046,183
Commissions to agents 118,864 110,513 113,721
Other operating costs 34,325 32,750 29,568
Insurance and claims 42,188 32,930 31,935
Selling, general and administrative 101,918 99,762 100,516
Depreciation and amortization 11,520 13,543 13,003
Non-recurring costs 5,270
------------ ------------ ------------
Total costs and expenses 1,424,824 1,319,952 1,340,196
------------ ------------ ------------
Operating income 83,681 76,386 82,613
Interest and debt expense 4,292 6,802 9,127
------------ ------------ ------------
Income before income taxes 79,389 69,584 73,486
Income taxes 30,168 26,790 28,292
------------ ------------ ------------
Net income $ 49,221 $ 42,794 $ 45,194
============ ============ ============
Earnings per common share (1) $ 3.05 $ 2.57 $ 2.57
============ ============ ============
Diluted earnings per share (1) $ 2.94 $ 2.50 $ 2.52
============ ============ ============
Average number of shares outstanding:
Earnings per common share (1) 16,141,000 16,672,000 17,562,000
Diluted earnings per share (1) 16,767,000 17,092,000 17,962,000
(1) All earnings per share amounts and average number of shares outstanding
have been restated to give retroactive effect to a two-for-one stock split
effected in the form of a 100% stock dividend declared July 17, 2002.
See accompanying notes to consolidated financial statements.
</TABLE> 52
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION> Fiscal Years Ended
December 28, December 29, December 30,
2002 2001 2000
(Dollars in thousands) ------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 49,221 $ 42,794 $ 45,194
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of operating property 11,520 12,327 11,787
Amortization of goodwill 1,216 1,216
Non-cash interest charges 273 97 324
Provisions for losses on trade and other accounts receivable 7,514 8,153 4,592
Losses (gains) on sales and disposals of operating property 642 (273) (244)
Deferred income taxes, net 5,513 1,776 3,911
Non-cash charge in lieu of income taxes 124 43
Changes in operating assets and liabilities:
Decrease (increase) in trade and other accounts receivable (11,221) 1,382 8,230
Decrease (increase) in prepaid expenses and other assets 933 1,194 (1,405)
Increase (decrease) in accounts payable 4,484 (7,189) (4,320)
Increase (decrease) in other liabilities 8,926 (8,294) (7,410)
Increase (decrease) in insurance claims 6,508 (3,513) (7,871)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 84,313 49,794 54,047
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (8,889) (496) (1,435)
Maturities of investments 2,500 1,484 1,060
Purchases of operating property (4,421) (5,443) (7,305)
Proceeds from sales of operating property 387 906 1,958
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (10,423) (3,549) (5,722)
------------ ------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in cash overdraft 3,527 (4,478) (1,975)
Borrowings on revolving credit facility 135,500 27,500
Principal payments on long-term debt and capital lease obligations (40,884) (128,269) (18,603)
Proceeds from repayment of notes receivable arising from
exercises of stock options 4,867 1,372 51
Proceeds from exercises of stock options 2,467 1,789 92
Purchases of common stock (26,306) (37,199) (46,185)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (56,329) (31,285) (39,120)
------------ ------------ ------------
Increase in cash 17,561 14,960 9,205
Cash at beginning of period 47,886 32,926 23,721
------------ ------------ ------------
Cash at end of period $ 65,447 $ 47,886 $ 32,926
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
53
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 28, 2002,
December 29, 2001 and December 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION> Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
----------------- Paid-In Retained ------------------- Exercises of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------ ------- -------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 25, 1999 13,063,974 $ 131 $65,833 $170,174 3,909,041 $(127,560) $ (1,694) $106,884
Net income 45,194 45,194
Purchases of common stock 864,000 (46,185) (46,185)
Exercises of stock options
and related income tax
benefit 169,900 1 5,048 (4,596) 453
Repayment of notes
receivable arising from
exercises of stock options 51 51
Incentive compensation paid
in common stock 444 (31,200) 1,018 1,462
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 30, 2000 13,233,874 132 71,325 215,368 4,741,841 (172,727) (6,239) 107,859
Net income 42,794 42,794
Purchases of common stock 500,000 (37,199) (37,199)
Exercises of stock options
and related income tax
benefit 94,960 1 3,711 (1,098) 2,614
Repayment of notes
receivable arising from
exercises of stock options 1,372 1,372
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 29, 2001 13,328,834 133 75,036 258,162 5,241,841 (209,926) (5,965) 117,440
Net income 49,221 49,221
Retirement of treasury
stock (5,241,841) (52) (76,389) (133,485) (5,241,841) 209,926 -
Purchases of common stock 554,879 (26,306) (26,306)
Exercises of stock options
and related income tax
benefit 116,160 1 3,962 (92) 3,871
Repayment of notes
receivable arising from
exercises of stock options 4,867 4,867
Stock split effected in
the form of a 100%
stock dividend 8,134,353 81 (81) -
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 28, 2002 16,337,506 $ 163 $ 2,609 $173,817 554,879 $ (26,306) $ (1,190) $149,093
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
</TABLE>
54
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary Landstar System Holdings, Inc. ("LSHI"). Landstar
System, Inc. and its subsidiary are herein referred to as "Landstar" or the
"Company." Significant inter-company accounts have been eliminated in
consolidation. The preparation of the consolidated financial statements
requires the use of management's estimates. Actual results could differ from
those estimates.
Fiscal Year
Landstar's fiscal year is the 52 or 53 week period ending the last Saturday in
December.
Revenue Recognition
Revenue and the related direct freight expenses are recognized upon completion
of freight delivery. Fuel surcharges billed to customers for freight hauled
by the independent contractors who provide truck capacity to the Company under
exclusive lease arrangements are excluded from revenue and paid in entirety to
the independent contractors.
Insurance Claim Costs
Landstar provides, primarily on an actuarially determined basis, for the
estimated costs of cargo, property, casualty, general liability and workers'
compensation claims both reported and for claims incurred but not reported.
Landstar retains liability for individual commercial trucking claims up to
$5,000,000 per occurrence. For commercial trucking claims incurred prior
to May 1, 2001, Landstar retains liability up to $1,000,000 per occurrence.
The Company also retains liability for each general liability claim up to
$1,000,000, $250,000 for each workers' compensation claim and $250,000 for
each cargo claim.
Tires
Tires purchased as part of trailing equipment are capitalized as part of the
cost of the equipment. Replacement tires are charged to expense when placed in
service.
Investments
Investments, all of which are intended to be held to maturity, consist of
investment grade bonds having maturities of up to five years and are carried
at amortized cost, which approximates fair value. Short-term investments
represent the current portion of these bonds. There are $7,648,000 and
$1,407,000 of these bonds included in other assets at December 28, 2002 and
December 29, 2001, respectively.
Operating Property
Operating property is recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets.
Trailing equipment is being depreciated over 7 years.
55
<PAGE>
Goodwill
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" in the first quarter
of fiscal year 2002. SFAS No. 142 eliminated the requirement to amortize
goodwill and requires that it be tested for impairment on an annual basis.
During the first quarter of 2002, the Company completed the transitional
goodwill impairment test and determined that the fair value of each
reporting unit exceeded the carrying value of the net assets of each
reporting unit. The Company updated its test for impairment for the fiscal
year ended December 28, 2002 and determined that the fair value of each
reporting unit exceeded the carrying value of the net assets of each
reporting unit. Accordingly, no impairment loss was recognized.
Adoption of SFAS No. 142 resulted in the elimination of goodwill amortization
expense beginning with the first quarter of 2002. During each of 2001 and
2000, the Company recorded goodwill amortization expense of $1,216,000.
Elimination of this amortization expense would have resulted in net income of
$44,010,000, or an increase of $0.07 in earnings per share ($0.07 per diluted
share), and $46,410,000, or an increase of $0.07 in earnings per share ($0.06
per diluted share), in 2001 and 2000, respectively. The Company has no other
intangible assets subject to the provisions of SFAS No. 142.
Income Taxes
Income tax expense is equal to the current year's liability for income taxes
and a provision for deferred income taxes. Deferred tax assets and
liabilities are recorded for the future tax effects attributable to temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
56
<PAGE>
Stock-Based Compensation
At December 28, 2002, the Company has two stock-based employee compensation
plans and one stock-based plan for members of its Board of Directors, which
are described more fully in footnote 9. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation is reflected in net income, as all options
granted under those plans had an exercise price equal to the fair market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share as if the Company
had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------
<S> <C> <C> <C>
2002 2001 2000
------- ------- -------
Net income, as reported $49,221 $42,794 $45,194
Deduct: Total stock-based employee
compensation expense determined
under the fair value based
method for all awards, net of
related income tax benefits (3,102) (1,187) (1,469)
------- ------- -------
Pro forma net income $46,119 $41,607 $43,725
======= ======= =======
Earnings per common share:
As reported $ 3.05 $ 2.57 $ 2.57
Pro forma $ 2.86 $ 2.50 $ 2.49
Diluted earnings per share:
As reported $ 2.94 $ 2.50 $ 2.52
Pro forma $ 2.80 $ 2.47 $ 2.46
</TABLE>
Earnings Per Share
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive stock options.
(2) Stock Split
On July 17, 2002, Landstar declared a two-for-one stock split of its
common stock to be effected in the form of a 100% stock dividend.
Stockholders of record on August 2, 2002 received one additional share of
common stock for each share held. The additional shares were distributed on
August 12, 2002. All share and per share amounts have been restated to give
retroactive effect to this stock split.
57
<PAGE>
(3) Non-recurring Costs
At December 25, 1999, approximately 100 Landstar Ranger, Inc.
("Landstar Ranger") drivers were represented by the International Brotherhood
of Teamsters (the "Teamsters"). The vast majority of these unionized drivers
participated in the Teamsters' Central States Southeast and Southwest Areas
Pension Fund (the "Fund"). As a result of the terms of a new collective
bargaining agreement, the Trustees of the Fund terminated participation in the
Fund by Landstar Ranger effective October 1, 2000. The Trustees of the Fund
regarded this action as a withdrawal by Landstar Ranger. In the third quarter
of 2000, the Company recorded a charge in the amount of $2,230,000 for the
cost of withdrawal from the Fund. After deducting related income tax benefits
of $880,000, this charge reduced fiscal year 2000 net income by $1,350,000,
or $0.08 per common share ($0.08 per diluted share). At December 28, 2002, 43
Landstar Ranger drivers were represented by the Teamsters and neither Landstar
nor any of its subsidiaries participate in any multi-employer pension plans.
On March 28, 2000, the Company announced a plan to restructure the operations
of Landstar Ligon, Inc. and to relocate its headquarters from Madisonville,
Kentucky to Jacksonville, Florida in June of 2000. As a result of this
restructuring and relocation, a one-time charge in the amount of $3,040,000
was recorded during the second quarter of 2000 representing approximately
$1,370,000 of employee and office relocation costs, $1,000,000 of severance
costs and $670,000 of other costs. The restructuring and relocation were
substantially completed by September 23, 2000. After deducting related income
tax benefits of $1,225,000, this one-time restructuring charge reduced fiscal
year 2000 net income by $1,815,000, or $0.10 per common share ($0.10 per
diluted share).
58
<PAGE>
(4) Income Taxes
The provisions for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Years
------------------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $23,362 $23,636 $21,525
State 1,293 1,254 2,813
------- ------- -------
24,655 24,890 24,338
Deferred:
Federal 4,273 1,454 4,208
State 1,240 322 (297)
------ ------- -------
5,513 1,776 3,911
Non-cash charge in lieu of income taxes 124 43
------- ------- -------
Income taxes $30,168 $26,790 $28,292
======= ======= =======
</TABLE>
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 28, 2002 Dec. 29, 2001
------------- -------------
<S> <C> <C>
Deferred tax assets:
Receivable valuations $ 4,092 $ 4,128
Deferred state income tax benefits 2,134 1,700
State net operating loss carryforwards 1,669 1,933
Self-insured claims 3,023 3,252
Other 2,421 5,052
--------- ----------
13,339 16,065
Valuation allowance (491) (491)
--------- ----------
$ 12,848 $ 15,574
========= ==========
Deferred tax liabilities:
Operating property $ 13,827 $ 11,378
Other 6,186 5,848
--------- ----------
$ 20,013 $ 17,226
========= ==========
</TABLE>
59
<PAGE>
At December 28, 2002, the valuation allowance of $491,000 was attributable to
deferred state income tax benefits, which primarily represented state
operating loss carryforwards at one subsidiary. The valuation allowance and
goodwill will be reduced by $463,000 when realization of deferred state
income tax benefits becomes likely.
The following table summarizes the differences between income taxes calculated
at the federal income tax rate of 35% on income before income taxes
and the provisions for income taxes (in thousands):
<TABLE>
<CAPTION>
Fiscal Years
---------------------------
2002 2001 2000
------- ------- -------
<S> <C> <C> <C>
Income taxes at federal income tax rate $27,786 $24,354 $25,720
State income taxes, net of federal income
tax benefit 1,646 1,024 1,635
Amortization of goodwill 258 258
Meals and entertainment exclusion 786 892 597
Other, net (50) 262 82
------- ------- -------
Income taxes $30,168 $26,790 $28,292
======= ======= =======
</TABLE>
Landstar paid income taxes of $23,540,000 in 2002, $24,778,000 in 2001 and
$25,089,000 in 2000.
(5) Operating Property
Operating property is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 28, 2002 Dec. 29, 2001
------------- -------------
<S> <C> <C>
Land $ 1,999 $ 2,045
Leasehold improvements 8,353 8,307
Buildings and improvements 8,168 7,963
Trailing equipment 85,034 71,957
Other equipment 26,061 22,715
-------- --------
129,615 112,987
Less accumulated depreciation and amortization 52,841 44,455
-------- --------
$ 76,774 $ 68,532
======== ========
</TABLE>
Included above is $64,278,000 in 2002 and $48,795,000 in 2001 of operating
property under capital leases, $45,465,000 and $35,613,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
into capital leases in the amount of $16,370,000 in 2002 and $18,448,000
in 2000. Landstar did not acquire any property by entering
into capital leases in 2001.
60
<PAGE>
(6) Retirement Plans
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution
plan for the benefit of full-time employees who have completed one year of
service. Eligible employees make voluntary contributions up to 75% of their
base salary, subject to certain limitations. Landstar contributes an amount
equal to 100% of the first 3% and 50% of the next 2% of such contributions,
subject to certain limitations.
Prior to the October 1, 2000 withdrawal (see note 3), Landstar Ranger made
contributions in accordance with a negotiated labor contract (generally based
on the number of weeks worked) to union sponsored multi-employer pension plans.
The expense for the Company-sponsored defined contribution plan was
$1,093,000 in 2002, $1,090,000 in 2001 and $1,105,000 in 2000. The expense
for union-sponsored plans, excluding the estimated cost of withdrawal
(see note 3), was $935,000 in 2000.
(7) Debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 28, 2002 Dec. 29, 2001
------------- -------------
<S> <C> <C>
Capital leases $ 33,360 $ 27,374
Revolving credit facility 44,000 74,500
-------- --------
77,360 101,874
Less current maturities 12,123 9,965
-------- --------
Total long-term debt $ 65,237 $ 91,909
======== ========
</TABLE>
On December 20, 2001, Landstar renegotiated its existing Credit Agreement with
a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the
"Third Amended and Restated Credit Agreement"). The Third Amended and
Restated Credit Agreement provides $175,000,000 of borrowing capacity in the
form of a revolving credit facility, $50,000,000 of which may be utilized in
the form of letter of credit guarantees. The Third Amended and Restated Credit
Agreement expires on January 5, 2005.
61
<PAGE>
Borrowings under the Third Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by JPMorgan Chase
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to JPMorgan Chase Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Third Amended and Restated Credit Agreement. The margin is
subject to an increase of .125% if the aggregate amount outstanding under the
Third Amended and Restated Credit Agreement exceeds 50% of the total borrowing
capacity. As of December 28, 2002, the margin was equal to 87.5/100 of 1%. The
unused portion of the Third Amended and Restated Credit Agreement carries a
commitment fee determined based on the level of the Company's Leverage Ratio,
as therein defined. As of December 28, 2002, the commitment fee for the unused
portion of the Third Amended and Restated Credit Agreement was 0.250%. At
December 28, 2002, the weighted average interest rate on borrowings outstanding
under the Third Amended and Restated Credit Agreement was 2.27%. Based on the
borrowing rates in the Third Amended and Restated Credit Agreement and the
repayment terms, the fair value of the outstanding borrowings under the Third
Amended and Restated Credit Agreement was estimated to approximate carrying
value.
The Third Amended and Restated Credit Agreement contains a number of covenants
that limit, among other things, the incurrence of additional indebtedness, the
incurrence of operating or capital lease obligations and the purchase of
operating property. The Third Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Third Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Interest
Coverage, earnings before interest and taxes exceeded the required minimum by
approximately $64,000,000 for the fiscal year ended December 28, 2002.
The Third Amended and Restated Credit Agreement provides for an event of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Third Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Third Amended and Restated Credit
Agreement.
The amount outstanding on the Third Amended and Restated Credit Agreement
is due and payable on January 5, 2005. There are no other installments of
long-term debt, excluding capital lease obligations, maturing in the next five
years.
Landstar paid interest of $4,480,000 in 2002, $7,874,000 in 2001 and
$9,658,000 in 2000.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 28, 2002, principally for trailing equipment and the Company's
headquarters facility in Jacksonville, Florida, are shown in the
following table (in thousands):
62
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2003 $13,631 $ 2,784
2004 10,222 2,260
2005 5,698 2,192
2006 3,591 2,094
2007 3,143 2,087
Thereafter 14,307
------- ---------
36,285 $ 25,724
=========
Less amount representing interest
(3.6% to 8.3%) 2,925
Present value of minimum -------
lease payments $33,360
=======
</TABLE>
Total rent expense, net of sublease income, was
$19,250,000 in 2002, $19,976,000 in 2001 and $19,620,000 in 2000.
(9) Stock Option Plans
All of the share and per share amounts that follow have been adjusted to
reflect a two-for-one stock split effected in the form of a 100% stock
dividend distributed on August 12, 2002 to stockholders of record on
August 2, 2002.
The Company maintains three stock option plans. Under the 1993 Stock Option
Plan, as amended, the Compensation Committee of the Board of Directors may
grant options to Company employees for up to 2,230,000 shares of common stock.
Under the 2002 Employee Stock Option Plan, the Compensation Committee of the
Board of Directors may grant options to Company employees for up to 1,600,000
shares of common stock. Under the 1994 Directors Stock Option Plan, as amended,
(the "DSOP"), outside members of the Board of Directors will be granted up to
an aggregate of 420,000 options to purchase common stock. Under the DSOP, each
outside Director will be granted 18,000 options to purchase common stock upon
election or re-election to the Board of Directors. Subject to approval of its
shareholders at the Company's 2003 annual meeting, the DSOP will be replaced by
a new Directors Stock Compensation Plan. Under the terms of the proposed plan,
each Director, upon election or re-election to the Board, will receive 1,500
shares of the Company's common stock subject to certain restrictions.
Options granted under the existing plans become exercisable in either three or
five equal annual installments, commencing on the first anniversary of the
date of grant, subject to acceleration in certain circumstances, and expire
on the tenth anniversary of the date of grant. Under the existing plans, the
exercise price of each option equals the fair market price of the Company's
common stock on the date of grant. At December 28, 2002, there were 3,172,160
shares of the Company's common stock reserved for issuance upon exercise of
options granted under the plans.
63
<PAGE>
Information regarding the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- --------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Shares Per Share Shares Per Share
-------- ----------------- -------- ----------------
<S> <C> <C> <C> <C>
Options at December 25, 1999 1,138,400 $ 15.71 573,040 $ 14.26
Granted 214,800 $ 23.90
Exercised (339,800) $ 13.80
Forfeited (3,600) $ 12.75
---------
Options at December 30, 2000 1,009,800 $ 18.11 424,120 $ 15.59
Granted 396,200 $ 33.02
Exercised (189,920) $ 15.20
Forfeited (93,040) $ 25.13
---------
Options at December 29, 2001 1,123,040 $ 23.28 415,360 $ 17.22
Granted 414,000 $ 36.88
Exercised (163,520) $ 15.67
---------
Options at December 28, 2002 1,373,520 $ 28.28 465,438 $ 21.17
=========
</TABLE>
The fair value of each option grant on its grant date was calculated using
the Black-Scholes option pricing model with the following assumptions for
grants made in 2002, 2001 and 2000: risk-free interest rate of 3.5% in 2002,
5.0% in 2001 and 6.0% in 2000, expected lives of 5 years and no dividend yield.
The expected volatility used in calculating the fair market value of stock
options granted was 40% in 2002 and 2001 and 41% in 2000. The weighted
average grant date fair value of stock options granted was $14.88, $14.16
and $10.81 per share in 2002, 2001 and 2000, respectively.
The following table summarizes stock options outstanding at December 28, 2002:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 28, 2002 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
<S> <C> <C> <C>
$14.055 - $20.250 429,000 5.8 $ 17.87
$20.251 - $34.129 416,920 7.8 $ 28.85
$34.130 - $51.895 527,600 8.9 $ 36.31
----------------
$14.055 - $51.895 1,373,520 7.6 $ 28.28
================
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 28, 2002 Per Share
----------------- ---------------- ----------------
<S> <C> <C> <C>
$14.055 - $17.867 158,280 $ 16.09
$17.868 - $20.250 165,118 $ 19.56
$20.251 - $34.224 142,040 $ 28.69
---------------
$14.055 - $34.224 465,438 $ 21.17
===============
</TABLE>
(10) Shareholders' Equity
During 2002, Landstar purchased 554,879 shares of its common stock at a total
cost of $26,306,000 pursuant to a previously announced stock purchase program.
As of December 28, 2002, Landstar may purchase an additional 445,121 shares of
its common stock under its authorized stock purchase program.
During 1998, the Company established an employee stock option loan program.
Under the terms of the program, the Company provided employees financing in
order for them to exercise fully vested stock options. The loans are full
recourse with the principal repayable in lump sum on the fifth anniversary
of the loan. During 2002, 2001 and 2000, $92,000, $1,098,000 and $4,596,000
of such loans were issued, respectively. Effective May 1, 2002, the Company
ceased making loans under the employee stock option loan program and terminated
the program with respect to future stock option exercises.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
65
<PAGE>
(11) Segment Information
The Company has three reportable business segments. These are the carrier,
multimodal and insurance segments. The carrier segment provides truckload
transportation for a wide range of general commodities over irregular
routes with its fleet of dry and specialty vans and unsided trailers,
including flatbed, drop deck and specialty. It also provides short-to-long
haul movement of containers by truck, dedicated power-only truck capacity
and truck brokerage. The carrier segment markets its services primarily
through independent commission sales agents and utilizes tractors provided
by independent contractors who provide truck capacity to the Company under
exclusive lease arrangements (the "Independent Contractors") and other third
party truck capacity providers. Transportation services provided by the
multimodal segment include the arrangement of intermodal moves, contract
logistics, truck brokerage and emergency and expedited ground and air freight.
The multimodal segment markets its services through independent commission
sales agents and primarily utilizes capacity provided by Independent
Contractors and other third party capacity providers, including truck brokerage
carriers, railroads and air cargo carriers. The nature of the carrier and
multimodal segments' business is such that a significant portion of their
operating costs varies directly with revenue. The insurance segment provides
risk and claims management services to Landstar's operating subsidiaries. In
addition, it reinsures certain property, casualty and occupational accident
risks of certain Independent Contractors who have contracted to haul freight
for Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates a segment's
performance based on operating income.
Internal revenue for transactions between the carrier and multimodal
segments is based on quoted rates which are believed to approximate the cost
that would have been incurred had similar services been obtained from an
unrelated third party. Internal revenue for premiums billed by the
insurance segment to the carrier and multimodal segments is calculated each
fiscal period based on an actuarial calculation of historical loss experience
and is believed to approximate the cost that would have been incurred by the
carrier and multimodal segments had similar insurance been obtained from an
unrelated third party.
No single customer accounts for more than 10% of consolidated revenue.
However, during 2002 approximately 12% of the Company's revenue was
attributable to the automotive industry. Substantially all of the Company's
revenue is generated in the United States.
66
<PAGE>
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 28, 2002,
December 29, 2001 and December 30, 2000 (in thousands):
<TABLE>
<CAPTION>
2002
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $1,178,263 $ 300,716 $ 27,576 $1,506,555
Internal revenue 23,703 2,483 29,860 56,046
Investment income 1,950 1,950
Interest and debt expense $ 4,292 4,292
Depreciation and
amortization 7,546 126 3,848 11,520
Operating income 87,777 7,793 22,754 (34,643) 83,681
Expenditures on
long-lived assets 329 4,092 4,421
Goodwill 20,496 10,638 31,134
Capital lease additions 16,370 16,370
Total assets 241,068 59,571 70,198 29,911 400,748
2001
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $1,098,268 $ 270,849 $ 23,654 $1,392,771
Internal revenue 28,587 2,367 27,313 58,267
Investment income 3,567 3,567
Interest and debt expense $ 6,802 6,802
Depreciation and
amortization 8,382 783 4,378 13,543
Operating income 76,105 5,343 30,644 (35,706) 76,386
Expenditures on
long-lived assets 2,994 159 2,290 5,443
Goodwill 20,496 10,638 31,134
Total assets 234,164 47,795 46,440 36,252 364,651
2000
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
External revenue $1,117,042 $ 277,087 $ 24,363 $1,418,492
Internal revenue 34,669 1,241 21,919 57,829
Investment income 4,317 4,317
Interest and debt expense $ 9,127 9,127
Depreciation and
amortization 7,999 905 4,099 13,003
Non-recurring costs 5,270 5,270
Operating income 88,507 9,346 24,464 (39,704) 82,613
Expenditures on
long-lived assets 687 177 6,441 7,305
Goodwill 21,291 11,183 32,474
Capital lease additions 18,448 18,448
Total assets 256,690 54,294 33,267 26,111 370,362
</TABLE>
67
<PAGE>
(12) Commitments and Contingencies
At December 28, 2002, Landstar had commitments for letters of credit
outstanding in the amount of $18,060,000, primarily as collateral for
estimated insurance claims, $9,080,000 of which were supported by the
Third Amended and Restated Credit Agreement and $8,980,000 secured by
assets deposited with a financial institution.
The Company and Ford Motor Co., Inc. are defendants in a suit alleging breach
of contract, misrepresentation and certain other causes of action arising out
of a contract between Landstar Logistics, Inc. and the plaintiff involving a
trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the
plaintiff, Gulf Bridge RoRo, Inc. The suit makes claim for $25,000,000
damages for breach of contract and $50,000,000 punitive and other damages
related to the misrepresentation counts. The Company has filed motions
for summary judgment with the court seeking, in addition to a judgment in its
favor, to dismiss Landstar System, Inc. from the litigation, to limit the
amount of damages obtainable by the plaintiff, to preclude fraud and other
theories upon which plaintiff seeks to obtain damages, and to exclude certain
evidence concerning damages sought to be introduced at trial by plaintiff,
among other things. Subject to the outcome of these motions, which is
anticipated in March 2003, discovery has been substantially completed in this
matter, and the Company anticipates that the matter will be tried in April
2003. The Company believes it has meritorious defenses to this litigation and
intends to continue to defend it vigorously. The Company also believes that
if this litigation were determined adversely to it, the liability of the
Company, exclusive of any available insurance recoveries, would not be
reasonably likely to have a material adverse effect on the financial condition
of the Company but that it could have a material adverse effect on the results
of operations in a given quarter or year. The Company has notified its
third-party insurance carrier that it believes that a portion of the claims
made in this lawsuit are covered under insurance provided by that carrier,
and the carrier has agreed to pay the fees and expenses and to participate
in the defense of this litigation, subject to a reservation of rights. The
Company also intends to pursue its rights with respect to this coverage
vigorously. No assurances can be given as to the outcome of this litigation
or any related matter, however.
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc.
("OOIDA") and six individual Independent Contractors filed a putative class
action suit in the U.S. Court in Jacksonville, Florida, against the Company.
The suit alleges that certain aspects of Landstar's motor carrier's leases
with owner operators violate the federal leasing regulations. OOIDA seeks
injunctive relief, damages and attorney's fees. On December 17, 2002, the
Company filed a Motion to Dismiss and a Motion to Stay and Compel Arbitration
with respect to all of the leases that contain arbitration clauses. Landstar
believes it has meritorious defenses to this litigation and intends to defend
it vigorously. Landstar also believes that it treats its Independent
Contractors fairly and in a manner which reflects the important role they play
in the Company's operations.
The Company is involved in certain other claims and pending litigation arising
from the normal conduct of business. Based on knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all such other claims and pending litigation and that the ultimate outcome,
after provisions thereof, will not have a material adverse effect on the
financial condition of Landstar, but could have a material effect on the
results of operations in a given quarter or year.
68
<PAGE>
Independent Auditors' Report
- ----------------------------
Landstar System, Inc. and Subsidiary
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar
System, Inc. and subsidiary as of December 28, 2002 and December 29, 2001, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 28, 2002, December 29, 2001
and December 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Landstar System,
Inc. and subsidiary as of December 28, 2002 and December 29, 2001, and the
results of their operations and their cash flows for the fiscal years ended
December 28, 2002, December 29, 2001 and December 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
December 30, 2001, Landstar System, Inc. and subsidiary adopted the provisions
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
/s/ KPMG LLP
Jacksonville, Florida
February 5, 2003
69
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
2002 2002 2002 2002
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 393,986 $ 385,660 $ 391,216 $ 335,693
========== ========== ========== ==========
Operating income $ 24,191 $ 23,451 $ 20,999 $ 15,040
---------- ---------- ---------- ----------
Income before income taxes $ 23,417 $ 22,485 $ 19,755 $ 13,732
Income taxes 8,899 8,544 7,507 5,218
---------- ---------- ---------- ----------
Net income $ 14,518 $ 13,941 $ 12,248 $ 8,514
========== ========== ========== ==========
Earnings per common share (1,2) $ 0.91 $ 0.86 $ 0.75 $ 0.53
========== ========== ========== ==========
Diluted earnings per share (1,2) $ 0.88 $ 0.83 $ 0.72 $ 0.51
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
2001 2001 2001 2001
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 347,788 $ 355,684 $ 358,018 $ 331,281
========== ========== ========== ==========
Operating income $ 20,093 $ 21,000 $ 19,486 $ 15,807
---------- ---------- ---------- ----------
Income before income taxes $ 18,820 $ 19,403 $ 17,776 $ 13,585
Income taxes 7,243 7,473 6,843 5,231
---------- ---------- ---------- ----------
Net income $ 11,577 $ 11,930 $ 10,933 $ 8,354
========== ========== ========== ==========
Earnings per common share (1,2) $ 0.72 $ 0.72 $ 0.64 $ 0.49
========== ========== ========== ==========
Diluted earnings per share (1,2) $ 0.70 $ 0.70 $ 0.63 $ 0.48
========== ========== ========== ==========
</TABLE>
(1) Due to the changes in the number of average common shares and common
stock equivalents outstanding during the year, the sum of earnings per share
amounts for each quarter do not necessarily add to the earnings per share
amounts for the full year.
(2) All earnings per share amounts have been restated to give retroactive
effect to a two-for-one stock split effected in the form of a 100% stock
dividend declared July 17, 2002.
70
<PAGE>
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years
2002 2001 2000 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue $1,506,555 $1,392,771 $1,418,492 $1,388,083 $1,283,607
Investment income 1,950 3,567 4,317 2,502 1,689
Costs and expenses:
Purchased transportation 1,116,009 1,030,454 1,046,183 1,022,203 950,343
Commissions to agents 118,864 110,513 113,721 111,666 101,409
Other operating costs 34,325 32,750 29,568 30,000 27,516
Insurance and claims 42,188 32,930 31,935 34,064 39,388
Selling, general and administrative 101,918 99,762 100,516 99,240 95,028
Depreciation and amortization 11,520 13,543 13,003 11,698 10,158
Non-recurring costs 5,270
--------- --------- --------- --------- ---------
Total costs and expenses 1,424,824 1,319,952 1,340,196 1,308,871 1,223,842
--------- --------- --------- --------- ---------
Operating income 83,681 76,386 82,613 81,714 61,454
Interest and debt expense 4,292 6,802 9,127 4,509 3,503
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 79,389 69,584 73,486 77,205 57,951
Income taxes 30,168 26,790 28,292 31,268 23,470
--------- --------- --------- --------- ---------
Income from continuing operations 49,221 42,794 45,194 45,937 34,481
Discontinued operations, net of
income taxes (22,589)
--------- --------- --------- --------- ---------
Net income $ 49,221 $ 42,794 $ 45,194 $ 45,937 $ 11,892
========= ========= ========= ========= =========
Earnings per common share:
Income from continuing operations (1)$ 3.05 $ 2.57 $ 2.57 $ 2.30 $ 1.56
Loss from discontinued operations (1) (1.02)
--------- --------- --------- --------- ---------
Earnings per common share (1) $ 3.05 $ 2.57 $ 2.57 $ 2.30 $ 0.54
========= ========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations (1)$ 2.94 $ 2.50 $ 2.52 $ 2.27 $ 1.55
Loss from discontinued operations (1) (1.02)
--------- --------- --------- --------- ---------
Diluted earnings per share (1) $ 2.94 $ 2.50 $ 2.52 $ 2.27 $ 0.53
========= ========= ========= ========= =========
<CAPTION>
(1) All earnings per share amounts have been restated to give retroactive
effect to a two-for-one stock split effected in the form of a 100% stock
dividend declared July 17, 2002.
Dec. 28, Dec. 29, Dec. 30, Dec. 25, Dec. 26,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 400,748 $ 364,651 $ 370,362 $ 365,441 $ 313,665
Long-term debt, including
current maturities 77,360 101,874 94,643 67,298 34,440
Shareholders' equity 149,093 117,440 107,859 106,884 111,848
</TABLE>
71
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>12
<FILENAME>ex21-1.txt
<DESCRIPTION>LIST OF SUBSIDIARY CORPORATIONS
<TEXT>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARY CORPORATIONS OF LANDSTAR SYSTEM, INC.
Jurisdiction % of Voting
Name of Incorporation Securities Owned
- ---- ---------------- ----------------
Subsidiary of Landstar System, Inc.:
Landstar System Holdings, Inc. Delaware 100
Subsidiaries of Landstar System Holdings, Inc.:
Landstar Express America, Inc. North Carolina 100
Landstar Inway, Inc. Delaware 100
Also d/b/a Inway Nationwide Transportation Services
Also d/b/a Independent Freightways, Inc.
Landstar Logistics, Inc. Delaware 100
Landstar Ligon, Inc. Delaware 100
Also d/b/a Ligon Contract Services in Kentucky
Landstar Acquisition Corporation Alabama 100
(formerly Landstar Poole, Inc.)
Landstar Ranger, Inc. Delaware 100
Also d/b/a Ranger/Landstar, Inc. in South Carolina
Risk Management Claim Services, Inc. Kentucky 100
Also d/b/a RMCS, Inc. in Alabama and California
Landstar Carrier Services, Inc. Delaware 100
Landstar Contractor Financing, Inc. Delaware 100
Landstar Capacity Services, Inc. Delaware 100
Signature Insurance Company Cayman Islands, BWI 100
Signature Technology Services, Inc. Delaware 100
Subsidiary of Landstar Ranger, Inc.
Landstar Gemini, Inc. Delaware 100
Also d/b/a Gemini Transportation Services of
Greensburg, PA in Ontario and New Jersey
Also d/b/a GTSI Transportation Services in Ontario
Also d/b/a Landstar Less Than Truck Load
Also d/b/a Landstar LTL
Subsidiary of Landstar Gemini, Landstar Inway,
Landstar Ligon and Landstar Ranger:
Landstar Corporate Services, Inc. Delaware 100
Subsidiary of Landstar Inway, Inc.
Landstar T.L.C., Inc. Delaware 100
72
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>13
<FILENAME>ex23-1.txt
<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT
<TEXT>
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Landstar System, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-76340 and No 33-94304) on Form S-8 of Landstar System, Inc. of our reports
dated February 5, 2003, relating to the consolidated balance sheets of
Landstar System, Inc. and subsidiary as of December 28, 2002 and December 29,
2001, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the fiscal years ended December 28,
2002, December 29, 2001, and December 30, 2000, and all related schedules,
which reports appear in the December 28, 2002 annual report on Form 10-K of
Landstar System, Inc.
/s/ KPMG LLP
Jacksonville, Florida
March 11, 2003
73
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>14
<FILENAME>ex24-1.txt
<DESCRIPTION>POWERS OF ATTORNEY
<TEXT>
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/28/02
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 28, 2002, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
/s/ David G. Bannister
--------------------------
David G. Bannister
DATED: February 5, 2002
74
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/28/02
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 28, 2002, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
/s/ Ronald W. Drucker
--------------------------
Ronald W. Drucker
DATED: February 5, 2003
75
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/28/02
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 28, 2002, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
/s/ William S. Elston
--------------------------
William S. Elston
DATED: February 5, 2003
76
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/28/02
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 28, 2002, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
/s/ Diana M. Murphy
--------------------------
Diana M. Murphy
DATED: February 5, 2003
77
<PAGE>
POWER OF ATTORNEY
Landstar System, Inc.
Annual Report on Form 10-K
for fiscal year ended 12/28/02
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint Henry H. Gerkens and Robert C. LaRose, and each of
them, with full power in each to act without the other, his true and lawful
attorney-in-fact and agent, in his name, place and stead to execute on his
behalf, as an officer and/or director of Landstar System, Inc.
(the "Company"), the Annual Report on Form 10-K of the Company for the fiscal
year ended December 28, 2002, and file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission (the "SEC") pursuant to Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), and any and all other instruments
which either of said attorneys-in-fact and agents deems necessary or advisable
to enable the Company to comply with the Act, the rules, regulations and
requirements of the SEC in respect thereof, giving and granting to each of said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing whatsoever necessary or appropriate to be done in and
about the premises as fully to all intents as he might or could do if
personally present at the doing thereof, with full power of substitution and
resubstitution, hereby ratifying and confirming all that his said attorneys-in-
fact and agents or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
/s/ Merritt J. Mott
--------------------------
Merritt J. Mott
DATED: February 5, 2003
78
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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